Market Reviews

Month in Review as at June 2024

Index returns at June 2024 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Key Market Points

• The Australian market continued to make gains, rising 1.0% during June with mixed returns across underlying sectors.
• The US and Japanese markets were the strongest overseas markets, finishing the month up 3.1% and 2.0% respectively (S&P 500 Index (USD) and Nikkei 225 Index (JPY)).

Australian equities

June saw the ASX 200 Accumulation Index rise by 1.0%. Following May’s mixed results, June was another month of a wide range of returns at the sector level. Financials ex-Property recorded the strongest returns (+5.1%), followed by Consumer Staples (+4.6%), Utilities (+4.6%) and Health Care (+4.4%). Laggards for the month were Materials (-6.5%), Energy (-1.6%) and Industrials (- 0.2%).

Three of the ‘Big Four’ banks led the way for Financials, as NAB, CBA and Westpac all posting gains. Macquarie Group shares also drove positive returns for the sector.

The decline in Materials stocks could be attributed to several factors. The Chinese economy continues to show signs of uncertainty as a disinflationary spiral lingers. The softening of commodity prices, especially iron ore, also weighed into the sell-off. Shares in Mineral Resources (ASX: MIN), one of the largest iron ore miners in the Index, fell approximately 25% over the month after the announcement that it was closing its Yilgarn Hub operation.

As the 2023/24 Australian Financial Year wrapped up, the ASX 200 posted total returns of 12.1%. After a strong finish to the year, Financials ex-Property was the leading sector gaining 29.2%. Three other sectors posted returns greater than 20%: Information Technology (+28.4%), Property (+24.7%) and Consumer Discretionary (+22.7%).

Global Equities

Both Emerging and Developed markets rallied in June, to a positive finish for the first half of 2024. Emerging markets outperformed developed markets in June returning 3.51% (MSCI Emerging Markets Index (AUD)) versus a 2.34% return (MSCI World Ex-Australia Index (AUD)).

Large Cap stocks drove growth in June, with the Nasdaq Composite gaining 18.6% for 1H 2024 and 6% for June (in local currency terms). While the S&P500 rose 15.3% and 3.6% (in local currency terms) over the same periods. Softening economic data and the lowering of projected rate cuts by the Federal Reserve by year end a driving force behind the bullish movements. The US Tech sector continued to charge with a 9.3% increase in June (in local currency terms).

European Equity markets were mostly lower, with the DAX 30 Index (EUR) dropping 2.37% while the FTSE EuroTop 100 Index (EUR) lost 0.25% in June as Central Banks began cutting rates and the French Election created market uncertainty.

Taiwanese markets were the best performing in the Asia-Pacific region for the first half of 2024 with the Taiex gaining 28.45% (in local currency terms). Largely boosted by Taiwan Semiconductors (TPE:2330) which gained 63% over the same period, as excitement around AI continues to drive sentiment. Japan also continued to gain with the Nikkei 225 Index up 2.01% in June (in local currency terms) after hitting all-time highs earlier in the year.

Property

The S&P/ASX 200 A-REIT Accumulation index progressed in June, finishing the month 0.39% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also advanced, up 0.83% for the month.

Australian infrastructure continued to perform strongly during June, with the S&P/ASX Infrastructure Index TR returning 2.35% for the month and up 5.27% YTD.

Fixed Income

Following a surge in bond markets during the first half of June, a quick sell-off in the latter half of the month swiftly reversed any gains. Month-end to month-end, Australian 2-Year Bond yields rose 4 basis points whilst Australian 10-Year Bond yields fell 10 basis points. The Australian bond market, measured by the Bloomberg AusBond Composite 0+ Yr Index, rose 0.77% over the course of June. At its June meeting, the RBA board voted to leave the cash rate target unchanged at 4.35%, with the market pricing in a low in the cash rate in 2026. Inflation remains sticky with the Australian Bureau of Statistics releasing higher than expected inflation figures – 4% for the year to May. Electricity and food prices were amongst the sectors with the highest price increases.

The global backdrop in June was a large driver of Australian bond market performances. The European Central Bank was one of the first to lower interest rates – lowering by 25 basis points, French elections were called, and U.S presidential campaigns were well underway, including the presidential campaign debate this month. Additionally, geopolitical uncertainties remain elevated – such as the heightened conflicts and tensions in the Middle East and Ukraine – and continue to have the potential to affect supply chains. Against this backdrop, U.S. 2-Year and 10-Year Treasury Note yields fell 11 and 10 basis points respectively.

Key Economic Points

• The RBA left the cash rate at 4.35% in its May meeting.
• Australian annual inflation came in above expectations at 4.0% in May.
• The ECB cut interest rates by 0.25 to 4.25%.

Australia

As expected, the RBA left the interest rate unchanged at 4.35% in its June meeting, but retained the option for further increases if inflation remains stubbornly above the 2-3% target rate.

The annual inflation rate rose to 4% in May, above the expected 3.8%, with the financial markets pricing in a 45% chance of rate hike by September this year, compared to 10% before the data release. Minutes from the RBA meeting earlier this month indicated increasing concerns that inflation may not be on track to return to the bank’s 2-3% target range by the end of 2025.

Retail sales rose 0.6%, exceeding the forecast of 0.2% as consumers took advantage of early end of financial year sales. Annual retail sales were up 1.7% in May compared to a year ago, a better-than-expected result, but still indicative of falling demand volume once price inflation is stripped out.

The unemployment rate dropped to 4.0%% in April, above the anticipated 3.9%. The Westpac-Melbourne Institute Consumer Sentiment Index rose marginally to 83.6 points for June, but remains far below the neutral level of 100, which was last seen in early 2022.

Composite PMI slowed to 50.6 in June, still in expansion territory but at the lower rate than previous months. The NAB business confidence index fell to -3 in May, suggesting that the subdued activity in Q1 has continued into Q2 as sentiment worsened in manufacturing, transport, and construction.

The trade surplus narrowed to $5.77 billion in May, well below the market forecast of $6.68 billion.

US

The Federal Reserve kept the target range for the federal funds rate unchanged at 5.25%-5.50% during its June meeting, with policymakers unlikely to reduce rates until there is greater confidence that inflation is moving sustainably towards 2%. Annual inflation unexpectedly eased to 3.3% in May, below the forecast 3.4% as inflation eased for food, shelter, and transportation.

June non-farm payrolls rose 206,000, ahead of the 190,000 market forecast. However, focus was on the overall 111,000 downward revisions to the previous two months’ figures. Unemployment rate rose to 4.1% from 4.0%, as expected amid a slight rise in the participation rate. New US jobless claims increased marginally to 238,000, while the continuing claims of those still unemployed hit a two and a half year high of 1.86 million people. These figures are considered to indicate a gradual cooling of the labour market, a positive sign which might support the Federal Reserve to proceed with interest rate cuts by year end.

Retail sales for the month of May rose 0.1%, below the expected increase of 0.3%, but ahead of the revised 0.2% decline for the prior month. Annual retail sales grew 2.3% for the year to May, above the market forecast of 2.1%, below the expected 2.1% increase. Consumer sentiment dropped to 68.2 in June, above the expected 65.8 as inflation expectations are moderating.

Composite PMI rose to 54.6 in June, with services showing significant improvement with a PMI of 55.1. Business confidence for the upcoming year, particularly in services, and increasing demand leading to higher operating capacity prompted companies to expand their workforce for the first time in three months.

The trade deficit widened to US$75.1 billion in May, below forecasts of a US$76.2 billion gap.

Euro area

The European Central Bank cut interest rates by 0.25% to 4.25% in its June meeting, in response to inflation declining by more than 2.5 percentage points since September 2023. The inflation rate in the Euro area eased to 2.5% in June, matching market expectations. The unemployment rate was flat at 6.4% in May, matching market forecasts.

Retail sales increased 0.1% in May, below the anticipated 0.2%, while annual sales rose 0.3%, better than the expected 0.1%. Consumer confidence rose to 14.0 in June, largely driven by slowing inflation.

The Composite PMI fell to 50.8 in June, significantly below expectations, with services growth offset by a deep contraction in manufacturing output.

UK

The Bank of England left interest rates unchanged at 5.25%, in line with market expectations. Two out of the nine policy makers voted in favour to a cut to 5.0%, with a decision to cut more ‘finely balanced’. Inflation rate for May year-on-year came in line with market expectations at 2.0%, better than the 2.3% reading reported in the prior month and hitting the Bank of England target rate.

Consumer confidence rose to -1 in June, improving for the third month in a row, but the headline score remains negative high borrowing and living costs batter household budgets. Retail sales for the month of May rose to 2.9%, ahead of the 1.5% expected and rebounding from the 1.8% contraction in the prior month. while annual sales rose 1.3%, above the anticipated 0.9% increase.

Composite PMI fell to 52.3 in June, as activity in both services and manufacturing slowed for the second month in a row.

China

Inflation in China dropped 0.1% in May, with the annual rate coming in at 0.3%, slightly below market expectations of 0.4%. China’s unemployment rate was flat at 5.0% in May, matching forecasts. Composite PMI came in at 52.8 in June with output growth accelerating in the manufacturing sector but easing for services.

Annual retail sales improved 3.7% in May, ahead of the expected reading of 3.0% and prior month rise of 2.3%.

Japan

The inflation rate rose to 2.8% in May, overshooting market forecast of 2.5%, whilst the core inflation rate also rose to 2.5%, below the 2.6% expected. Retail sales increased 1.7% in May, well above the forecast of -0.5%, with annual sales growing 3.0%, also well above the 2.0% forecast.

Consumer confidence increased marginally to 36.4 in June, just below market expectations of 36.5.

Composite PMI dropped to 49.7 in June as the rise in manufacturing output was outweighed by a fall in services activity.

Currencies

The Australian dollar (AUD) appreciated over the month of June, closing 0.3% higher in trade weighted terms to 63.3, appreciating against all four referenced currencies in this update.

The AUD/USD exchange rate experienced its least volatile month since December 2002. This marks its third monthly increase in the past four months and its highest monthly close since December of the previous year. The strength of the US Dollar (USD) offset the impact of a hawkish RBA statement and higher-than- expected Australian inflation on the AUD/USD. The Japanese Yen (JPY) was the most notable mover, dropping to its lowest level against the Aussie dollar since 2007 and its lowest level against the USD since the mid-1980s.

Relative to the AUD, the USD depreciated the least during the month, closing 0.2% lower. The laggard of the month was the JPY, depreciating in relative terms against the AUD by 2.7%. Year-on-year, the AUD is ahead of the USD, Pound Sterling (GBP), Euro (EUR) and JPY by 0.8%, 0.8%, 2.7% and 12.5%, respectively.

Important notice

_{This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.
Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.
Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).
Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.
For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf
Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).}

Month in Review as at May 2024

Index returns at May 2024 (%)

_{Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).}

Key Market Points

• The Australian market gained 0.9% during May with Information Technology leading all sectors.
• Most overseas markets finished the month higher. US markets rallied strongly with the S&P 500 gaining 5.0%. European markets, represented by the FTSE Eurotop 100 Index, were also up 2.9%.

Australian equities 

The ASX 200 Index recorded a modest 0.9% gain in May. There was a broad dispersion of returns at the sector level. Information Technology (I.T.) led all sectors (+5.5%), while Utilities (+3.4%), Financials ex-Property (2.6%) and Property (+1.9%) also saw solid returns. Communications (-2.6%) experienced the most significant downturn. Consumer Staples (-1.0%), Energy (-0.7%) and Consumer Discretionary (-0.6%) were other laggards.

A further rise in the consumer price index has, seemingly, raised the chances of the Reserve Bank of Australia (RBA) keeping interest rates steady and has blunted the market’s risk sentiment. Despite this, I.T. has maintained its impressive performance in 2024, mirroring the surge in the tech-dominated U.S. Nasdaq Index. Meanwhile, investors are still showing interest in Utilities. A strong result in May consolidated 13.5% returns over three months for the sector.

As consumer pressures persist, the outlook weakens for sectors with higher exposure, particularly Consumer Discretionary. This was evident in weak profit guidance from the nation’s largest car dealership group, Eagers Automotive (ASX: APE), resulting in a 20% drop in its share price.

Global Equities 

Emerging markets underperformed developed markets in May returning -1.81% (MSCI Emerging Markets Index (AUD)) versus a 2.02% return (MSCI World Ex- Australia Index (AUD)) as large and mid-cap markets continue to outperform small cap markets.

US indices rallied into the end of the month as further evidence of a disinflationary environment boosted markets. The Nasdaq, Dow Jones and S&P500 all hit new all-time highs during the month as the Tech sector continued to gain on AI trades and strong earnings.

More than half of the S&P 500’s gains for the month were attributed to Nvidia, Apple, Microsoft and Alphabet. The S&P500 gained 4.96% (in local currency terms) while the Nasdaq Composite gained 7.0% (in local currency terms).

European markets were mostly higher despite higher than anticipated inflation, while UK inflation continued to ease with a drop in headline inflation. The FTSE 100 Index and DAX 30 Index gained 2.08% and 3.16% respectively (in local currency terms).

Property 

The S&P/ASX 200 A-REIT Accumulation index progressed during May, with the index finishing the month 1.9% higher. Global real estate equities also performed well, advancing 3% for the month. Australian infrastructure performed strongly during May, with the S&P/ASX Infrastructure Index TR returning 2.9% for the month and up 2.9% YTD.

The Australian residential property market experienced an increase of +0.8% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth was the biggest riser (+2%), followed by Adelaide (+1.8%) and Brisbane (+1.5%). In contrast, Melbourne (+0.1%) was the worst performer during May.

Fixed Income 

In its May meeting, the RBA decided to leave the cash rate target unchanged at 4.35%, with the board expecting that it will be some time before inflation is sustainably low, with the RBA’s updated economic projections showing inflation slowly returning to target over the next few years.

Australian bond yields were relatively stable over the course of the month, with 2- Year Bond yields rising 3 basis points and 10-Year Bond yields falling 1 basis point. The Australian fixed income market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, returned 0.39% month-end to month-end. CPI numbers in April came back higher than expected at 3.6% and the unemployment rate rose to 4.1% in May.

In the U.S, the Federal Reserve had a similar view and unanimously voted to hold policy rates steady, maintaining the federal funds target rate at 5.25-5.5%. Unlike the Australian market, the U.S bond market gained strength in May with U.S 2-Year and 10-Year Treasury Note yields dropping 17 and 18 basis points respectively. Softer inflation numbers and a cooling job market resulted in a drop in the Treasury yield curve, with the market pricing in at least one rate cut in 2024.

Key Economic Points 

• The RBA left the cash rate at 4.35% in its May meeting.
• Australian annual inflation came in above expectations at 3.6% in April.
• Australian GDP growth came in at 1.1% for the March quarter.

Australia 

The RBA left interest rate unchanged at 4.35% in its May meeting, however worse than expected inflation figures have put back the prospect of a cut until late 2025. The annual inflation rate in April came in at 3.6%, above the expected 3.4%. RBA forecasts it will take until late 2025 for inflation to come back to the 2-3% target range. Financial markets are fully pricing in a first RBA rate cut only by the middle of 2025.

Retail sales figures for April rose 0.1% with spending remaining subdued as cautious consumers have reduced discretionary spending. Annual growth was 1.3%, indicating falling demand once price inflation is stripped out.

These results further complicate the RBA’s role in steering inflation back towards a 2-3% target range without incrementally weakening the domestic economy.

GDP growth for the Q1 2024 was confirmed at only +0.1%, below market expectations. The annual growth rate of the economy has slowed to +1.1%, down from +1.5% during calendar year 2023, but upward revisions to Q4 2023 indicated surprising momentum and may have further reduced prospects for a local rate cut this year.

The unemployment rate rose to 4.1% in April, above the anticipated 3.9%. The Westpac-Melbourne Institute Index of Consumer Sentiment edged down to 82.2 in May, falling for a second consecutive month, as sticky inflation and higher interest rates continue to weigh on households.

Composite PMI decreased to 52.1 in May, indicating a slower pace of growth than previous months. The NAB business confidence index remained at 1 in April, with sentiment weak in retail, wholesale and mining.

The trade surplus widened to $6.55 billion in April, well below the market forecast of $7.3 billion.

US 

GDP growth rate for Q1 2023 came in line with forecasts at 1.3%, down from the 3.4% in the previous quarter. Performance was mostly driven by a downward revision in consumer spending.

The Federal Reserve kept the target range for the federal funds rate unchanged at 5.25-5.50% during its May meeting for the sixth consecutive time, as ongoing inflationary pressures and a tight labour market indicate a stall in progress toward bringing inflation back down to its 2%. Annual inflation eased to 3.4% in April, in line with market expectations as inflation steadied for food and shelter.

The economy added 272,000 jobs in May, well above forecasts of 185,000 and the most growth in five months. The unemployment rate rose to 4.0%, against expectations of a flat reading at 3.9%.

Retail sales were unchanged in April, below the anticipated 0.4%, suggesting consumer spending has eased slightly. Annual retail sales grew 3.0% for the year to April, below the expected 3.8% increase. Consumer sentiment dropped to 69.1 in May, well below April’s 77.2, attributed to concerns over inflation and the labour market on consumers.

Composite PMI rose to 54.5 in May, as growth accelerated in both manufacturing and services. The trade deficit widened to US$74.6 billion in April, below forecasts of a US$76.1 billion gap.

Euro area 

The inflation rate in the Euro area rose for the first time in five months to 2.6% in May, up on the 2.5% expected and the 2.4% reported in the prior period. Prices were higher for energy and services, with a slowdown in inflation for food, alcohol and tobacco, and non-energy industrial goods.

The unemployment rate declined to 6.4% in April, below the market forecast 6.5%. Retail sales declined 0.5% in April, below the anticipated 0.3%. Annual retail sales were flat, below the expected 0.1% rise. Consumer confidence rose to -14.3 in May, driven by slowing inflation and expectations of an imminent rate cut by the ECB. The Composite PMI rose to 52.2 in May, as stronger demand boosted output and hiring.

UK 

Early estimates suggested that the British economy grew 0.6% on quarter in the first three months of 2024, above forecasts of 0.4%, and ending the recession it entered last year. It also marks the strongest expansion in over two years, with services rising 0.7% amid widespread growth across the sector.

The annual inflation rate eased to 2.3%, slightly above the market forecast of 2.1%. The largest downward pressure came from falling gas and electricity costs, due to the lowering of the energy price cap in April.

Consumer confidence rose to -17 in May, improving for the second month, however the cost-of-living crisis and high borrowing costs continue to weigh on sentiment. Retail sales fell 2.3% in April, compared to the expected 0.4% decline, while annual sales decreased by 2.7%, well down on the anticipated 0.4% drop.

The unemployment rate for the three months to April rose to 4.4% as manufacturing, retail and hospitality employers cut jobs. At the same time, wage growth remains strong at 6.4%, helped by April’s 10% increase to the National Living Wage. The Bank of England is unlikely to cut interest rates until August at the earliest until wage rises moderately.

Composite PMI fell to 53.0 in May, driven by solid growth in services activity. Prime Minister Rishi Sunak unexpectedly called a general election for July 4, hoping to capitalise on improved economic conditions.

China 

The Chinese economy grew by a seasonally adjusted 1.6% in Q1 2024, quickening from an upwardly revised 1.2% increase in the previous quarter. This brings annual growth in the same period to 5.3%, mainly driven by exports and manufacturing investment.

Challenges persist in real estate and local government investments, continuing to hinder economic growth. Inflation in China increased 0.1% in April, with the annual rate coming in at 0.3%, above the market forecast of 0.1%.

China’s unemployment rate decreased to 5.0% on April, below the expected 5.2%. Composite PMI dropped to 51.0 in May as factory activity dropped for the first time since February and services growth was soft. Annual retail sales were weaker at + 2.3% in April, the softest gain in 15 months and missing the market forecast of 3.8%.

Japan 

Japanese core CPI inflation slowed for the second month to an annual rate of +2.5% as food, healthcare and education rises moderated. In a public speech, the Bank of Japan’s Governor Ueda declared that the bank will “proceed cautiously” with its monetary policy, suggesting that further interest rate hikes may be postponed into next calendar year.

Retail sales increased 1.2% in April, rebounding from March’s 1-1.2%, with annual sales growing 2.4%, well above the 1.9% forecast. Consumer confidence dropped to 36.2 for May, well below market expectations of 38.9, and is at its lowest level since November 2023. Composite PMI rose marginally to 52.6 in May, as manufacturing output stabilised and the services economy remained robust.

Currencies 

The Australian dollar (AUD) appreciated over the month of May, closing 1.5% higher in trade weighted terms to 63.1, appreciating against all four referenced currencies in this update.

The AUD experienced its largest monthly gain against the USD since December. The exchange rate rose as the USD weakened following a lacklustre US employment report, which increased market expectations for Fed rate cuts this year. Mid-month, news of slowing April inflation further supported these expectations after three months of weak CPI data. The AUD was among the strongest in the G10 currency basket, finishing the month at an 11-year high against the Japanese Yen (JPY).

Relative to the AUD, the Pound Sterling (GBP) depreciated the least during the month, closing 0.7% lower. The laggard of the month was the USD, depreciating in relative terms against the AUD by 2.6%. Year-on-year, the AUD is ahead of the USD, GBP, Euro (EUR) and JPY by 2.9%, 0.1%, 0.9% and 15.9%, respectively.

Important notice

_{This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.
Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.
Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).
Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.
For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf
Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).}

Month in Review as at April 2024

Index returns at April 2024 (%)

_{Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).}

Key Market Points

• The Australian market was weaker in April, finishing the month 2.9% lower. Leading the market lower were the Property, Consumer Discretionary and Communications sectors. The only sectors finishing the month stronger were Utilities and Materials.
• Most developed markets finished the month lower, with falls in the US and Europe. The UK and Asian markets finished the month higher.

Australian equities 

Following a run of gains, the ASX 200 finished April down 2.9%, the Index’s first negative month since October 2023. Losses were felt broadly at the sector level, with Property (-7.8%), Consumer Discretionary (-5.1%), Communications (-4.9%) and Energy (-4.7%) seeing the biggest falls. Utilities (+4.8%) and Materials (+0.6%) were the only sectors which had a positive month.

The evolving interest rate environment was a significant contributor to the losses seen in the market, as data both locally and abroad pointed towards fewer rate cuts this year. This was most obvious in the rate-sensitive sectors, with Property being the most notable. Consumer Discretionary shares were hit by rate sentiment, while also being dragged down by The Star Entertainment Group (ASX: SGR), whose shares plunged by nearly 30% in the month. The Energy sector had a weak month despite accommodating oil prices.

As market volatility and geopolitical uncertainty was amplified in April, the market flocked to Utilities, as the defensive sector became a haven for investors. AGL Energy Limited (ASX: AGL) was a strong performer for the sector as it closed the month up 13.4%, after a class action proceeding was dismissed.

Global Equities 

Developed equity markets finished lower, ending a five-month rally, while Emerging markets continue to gain. Developed markets in April returned -3.26% (MSCI World Ex-Australia Index (AUD)) versus a 0.92% return from Emerging Markets (MSCI Emerging Markets Index (AUD)).

US indices declined for the first time since October as the likelihood of a Federal Reserve rate cut lowered. Sentiment has shifted in the market to expectations of a 25-basis point rate cut by the end of the year as the Fed searches for clearer signs of further deflation.

The Nasdaq 100 dropped -4.4% for the month (in local currency terms), while the S&P 500 lost -4.08% for the month (in local currency terms). However, despite the macro-outlook, corporate earnings were generally positive with a higher-than-expected growth rate.

Japan similarly lost hard fought gains as the market mirrored wall street and the tech-sector lost favour. The Nikkei 225 Index dropped -4.86% for the month (in local currency terms).

The CSI 300 and Hang Seng gained 2.01% and 7.45% (in local currency terms), respectively. This reflects a continuing rebound from a tumultuous beginning of the year, boosted by strong GDP growth and PMI expansion.

Property 

The S&P/ASX 200 A-REIT Accumulation index regressed for the first time this year in April, with the index finishing the month 7.8% lower. Global real estate equities (represented by the FTSE EPR/NAREIT Developed Ex Australia Index (AUD Hedged)) also performed poorly, falling 5.1% for the month.

Australian infrastructure continued its slight negative trend through April, with the S&P/ASX Infrastructure Index TR returning -0.1% for the month and -0.1% YTD.

Fixed Income 

April was a tough month for bond markets, both locally and internationally, with yields back at levels last seen in December 2023. Over the month price pressures remained stubborn, CPI numbers came in higher than expected and the housing market continued to rise.

Against this backdrop, Australian 2- and 10- Year bond yields rose 33 and 41 basis points respectively over the course of the month and the Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, fell 1.98%.

Globally, bonds markets exhibited a similar story. US inflation remained sticky, and markets shifted their stance on any near-term rate cuts from the Fed. US 2- and 10- Year bond yields rose 42 and 77 basis points respectively over April, and the Bloomberg Global Aggregate Index was down 2.07%. The latest batch of US economic data exhibited strong evidence that inflation remains hot, with markets pricing in only one rate cut in 2024 from the Fed with expectations that that a much tougher stance on inflation will be taken.

Key Economic Points 

• Australian annual inflation was 3.6% in the March quarter.
• Major central banks left rates on hold, continuing with the wait and see approach to inflation.

Australia 

Annual inflation came in at 3.6% for the March quarter, down from 4.1% in the December quarter, but above market expectations of 3.4%, stoking the possibility of further interest rate increases. Most concerning for the RBA was the strength in the trimmed mean inflation rate, which was higher than both the market expectations and the December quarter figure, with inflation particularly sticky across the services and housing sectors.

Retail sales figures for March were weaker than expected, declining 0.4% from February’s levels, and gaining only 0.8% compared to March 2023, representing a decline in sales volume once adjusted for inflation over that period. This and other recent indications of a weakening domestic economy have complicated the deliberations of the RBA, with the financial markets now anticipating that the local cash rate could finish the year higher than the current 4.35%.

The unemployment rate rose to 3.8% in March, below the anticipated 3.9%. The Westpac-Melbourne Institute Index of Consumer Sentiment fell to 82.4 in April as persistent inflation and high interest rates continued to weigh on Australian households.

Composite PMI decreased to 53 in April, indicating a slightly slower pace of growth than previous months. The NAB business confidence index rose to 1 in March and while this is below the long-run average, sentiment has improved in retail, construction and transport.

The trade surplus fell to $5.0 billion in March, well below the market forecast of $7.3 billion.

US 

The US Federal Reserve kept interest rates on hold, as widely expected, however Chairman Jerome Powell noted that it may take longer than previously expected for policymakers to become comfortable that inflation was on track towards the Fed’s 2% target.

Annual inflation growth was 3.6% in March, above the expected 3.4%, largely due to energy and transport costs.

Larger than expected increases in labour costs also added to concerns about persistent inflation. The US Labor Department’s employment cost index rose 1.2% in the first quarter of 2024, an acceleration from the +0.9% rate in the three months to December. Private sector wages also accelerated to +1.1% in the March quarter.

The economy added 175,000 jobs in April, well short of the anticipated 243,000, underscoring a significant slowdown in the jobs market. The unemployment rate rose to 3.9%, against an expected 3.8%.

Retail sales rose 0.7% in March, well above the anticipated 0.3% gain, suggesting consumer spending remains robust. Annual retail sales grew 4.0% for the year to March, ahead of the anticipated 2.5% increase. Consumer sentiment dropped to 77.2 in April from 79.4 in March, with concerns about the nation’s economic future pending the outcome of the presidential election.

Composite PMI eased to 51.3 in April just below the anticipated 52.2. Despite this fall it represents an uptick in factory activity.

The trade deficit was US$69.4billion in March, above the anticipated US$69.1 billion.

Euro area 

Headline CPI inflation remained at +2.4% for the 12 months to April, while Core inflation decelerated only slightly to +2.7%, both rates were higher than anticipated. The region’s GDP growth for the March quarter was also better than expected at +0.3%, helped by Germany’s return to growth.

The European Central Bank (ECB) maintained its interest rates at 4.5% during its April meeting and despite the previously mentioned sticky inflation, recent comments from policymakers still suggest that a rate cut is likely in June.

The unemployment rate remained at a record low of 6.5% in March, in line with market forecasts.

Retail sales jumped 0.8% in March, reversing the 0.3% fall in February and ahead of the anticipated 0.6%. Annual retail sales grew 0.7%, well above the anticipated -0.3%. Consumer confidence rose to -14.7 in April suggesting a gradual brightening of views on both personal and general economic situations. Whilst encouraging, this figure is still well below the long-term average.

The Composite PMI rose to 51.7 in April, driven by an uptick in services activity.

UK 

Inflation rose by 0.6% in April, with the annual rate falling to 3.2%, both driven by a slowdown in increases in food prices.

Consumer confidence rose to -19 in April, improving for the first time in three months and coming in above market expectations of -20. The index has been ranging between -24 and -19 for the last six months, indicating slow progress as economic uncertainties continue to weigh heavily on households.

Retail sales were flat in March, compared to the expected 0.3% increase, while annual sales increased 0.8%, just above the anticipated 0.7%. Conditions remain delicate as price rises have been blamed for many retailers having a difficult start to the year. The expected uptick in spending from lower inflation and January’s cut to National Insurance is yet to materialise.

Composite PMI rose to 54.1 in April, driven by the robust and accelerated upturn in services activity.

China 

Inflation in China dropped 1% month on month in March, compared to the market estimate of -0.5%. Annual inflation rose 0.1% for the year to March, below the expected 0.4% rise, as the effects of Lunar New Year spending waned.

China’s unemployment rate dropped marginally to 5.2% in March, in line with market expectations.

Composite PMI edged up to 52.8 in April, with the growth of the manufacturing sector being the highest in 14 months and services activity supporting this long run of expansion.

Business sentiment remained unchanged from March.

Annual retail sales grew 3.1% in March, well short of the expected 4.5%. Consumer confidence remains subdued at 89.1 in February, well below the long-term average of 109.85.

Japan 

The Bank of Japan (BOJ) maintained the cash rate at the 0% to 0.1% range at its April meeting, having raised it for the first time in 16 years in March. The Yen fell to near record lows following the March decision and remains weak, putting additional cost pressures on both businesses and households.

Retail sales declined 1.2% in March, missing market expectations for 0.6% growth. Annual sales grew 1.2%, slowing from 4.7% in February and well below the anticipated 2.5%.

Composite PMI rose to 52.3 in April with services activity expanding and factory activity stabilizing following declines in the last ten months.

Currencies 

The Australian dollar (AUD) appreciated over the month of April, closing 1.1% higher in trade weighted terms to 62.2, appreciating against the Japanese Yen (JPY), Pound Sterling (GBP) and Euro (EUR).

The AUD weakened against the US dollar (USD), marking its third monthly decline in four months. Initially, the AUD saw gains due to soft US economic data and dovish remarks from Fed Chair Jerome Powell. However, it slid as US CPI inflation and geopolitical tensions rose. A rebound followed with improved Australian inflation data, but strengthened US labour costs pushed the USD higher again. Overall, the AUD strengthened against the G10 currency basket.

Relative to the AUD, the USD led the pack during the month, appreciating by 0.5%. The laggard of the month was the JPY, depreciating in relative terms against the AUD by 3.6%. Year-on-year, the AUD remains behind the GBP and USD by -1.5% and -1.9% respectively, whilst ahead of the JPY and EUR by 13.3% and 1.2% respectively.

Important notice

_{This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.
Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.
Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).
Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.
For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf
Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).
Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).}

Month in Review as at March 2024

Index returns at March 2024 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.

Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Key Market Points

• The Australian market had a strong month in March, finishing 3.3% higher. Leading the market higher were Property, Energy and Utilities. The only sector finishing the month lower was Communications.
• Overseas markets also finished the month materially higher, with strong gains seen across the US, Europe and the UK.

Australian equities 

The ASX 200 rose 3.3% in March, with the strong month punctuated by gains seen in ten of eleven sectors.

Property delivered the largest returns (+9.7%), while Energy (+5.3%) and Utilities (+4.8%) were other market-leaders. Despite only a minor retraction (-0.6%), Communications finished as the only sector in the red.

Despite mixed macro data releases, Property was the beneficiary of stabilising bond yields, slowing inflation, and a more dovish tone from the RBA. The market sentiment pointing towards a rate cut in late 2024 was a positive factor for the rate-sensitive sector. Of the individual constituents, McGrath Ltd (ASX: MEA) rose significantly after shareholders received a takeover bid.

Energy stocks clawed back some of the losses from February, with a few factors contributing to the uptick. Perhaps most importantly, OPEC+ members extended production cuts, a major contributor to rebounding oil prices. As a result, shares in stocks such as Santos (ASX: STO) and Beach Energy (ASX: BPT) saw significant rises.

In the first quarter of 2024, the ASX 200’s 5.3% gain was outpaced by major global indices, with the Japanese Nikkei up 18.1%, the S&P 500 up 10.6%, and major European stocks up 8.4%.

Global Equities 

Global equity markets continued to rally, finishing Q1 on record highs. Emerging markets underperformed developed markets in March returning 2.28% (MSCI Emerging Markets Index (AUD)) versus a 3.02% return (MSCI World Ex-Australia Index (AUD)).

US indices continued to beat all-time highs, as market momentum boosted investor confidence and the Fed reiterated their commitment to three rate cuts in 2024. The Nasdaq Composite gained 1.8% for the month and 9.3% for the quarter (in local currency terms), while the S&P 500 gained 3.2% for the month and 10.6% for the quarter (in local currency terms), up 26.1% over five straight months of gains.

Japan similarly continued to extend its all-time high, the Nikkei 225 Index gaining 3.78% for the month (in local currency terms), as continued low interest rates and a weaker Yen drive growth.

The CSI 300 and Hang Seng gained 0.61% and 0.64% (in local currency terms), respectively. After a strong lunar new year, demand turned headline inflation positive and the annual National People’s Congress revealed a 5% growth target for 2024. This all comes despite the continued slowdown in the property sector and a 10- month low in the iron ore price.

Property 

The S&P/ASX 200 A-REIT Accumulation index continued the strong start to the year in March, rallying 9.7%. Global real estate equities (represented by the FTSE EPR/NAREIT Developed Ex Australia Index (AUD Hedged)) finished 3.5% higher.

The AREIT index outperformed the broader markets buoyed by a fall in the Australian 10-year bond rate and continued M&A activity and transaction markets opening.

Fixed Income 

Exhibiting a continued hawkish stance, the RBA has held the cash rate at 4.35% for the third straight meeting this year. Australian bond markets remained relatively unchanged with 10- and 2- Year Bond yields falling 5 and 4 basis points respectively over the course of the month. The Australian economy continues to show signs of progress, with the market anticipating rate cuts by the end of 2024. Against this backdrop, the Bloomberg AusBond Composite 0+ Yr Index returned 1.12% over the course of the month.

Globally, The US economy has remained resilient despite The Fed’s efforts to cool inflation by keeping interest rates at their 23-year high following their March meeting. US 2-Year Treasury Note yields were unchanged month-end to month-end, while 10-year Treasury yields rose 29 basis points. The sell-off comes as investors become less optimistic on expected rate cuts.

In the UK, the Bank of England board is determined to meet the 2% inflation target and has voted to maintain the Bank Rate at 5.25%. UK 2- and 10- Year Gilt yields fell 41 and 28 basis points respectively. This follows the announcement of a historic gilt issuance, with the UK to sell £265bn of gilts.

Key Economic Points 

• Australian inflation was flat at 3.4% in February.
• Major central banks left rates on hold, continuing with the wait and see approach to inflation.
• The RBA left rates at 4.35% with markets anticipating a 0.25% rate cut in November.

Australia 

The RBA left the cash rate at 4.35%, as widely expected. However, the accompanying commentary suggested that the bank’s previous bias towards further rate hikes had moderated to a more neutral stance. Governor Michele Bullock stated that “the Board is not ruling anything in or out”. Financial markets now anticipate a first 0.25% rate cut in November this year.

Annual inflation remained at 3.4% in February. This result was slightly below expectations of 3.5%, but there are mixed views amongst economists on the implications for RBA policy. Financial markets continue to price in a first interest rate cut in November this year for Australia, later than expectations for the other major Western economies.

The unemployment rate fell to 3.7% in February, below the anticipated 4.0%, with commentators suggesting the topsy turvy nature of the labour market reflects changes to the way and time we work throughout the year.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell to 84.4 in March, amid renewed concerns about the economy and family finances. Retail sales rose 0.3% in February, matching market estimates but slowing sharply from January’s +1.1%. The annual rate increased 1.6%.

Composite PMI rose to 53.3 in March, driven by strong growth in the services sector. The NAB business confidence index dropped back to 0 in February with the retail sector being the major drag amid high borrowing costs and elevated inflation.

The trade surplus fell to $7.3 billion in January, below the market forecast of $9.9 billion.

US 

The Federal Reserve maintained interest rates at 5.25 – 5.5% but upgraded its expectations for US economic growth in 2024 from +1.4% to +2.1%. Financial markets were relieved that Fed policymakers maintained their expectation for three interest rate cuts in 2024.
Headline inflation growth was 3.5% for the year to March, above the expected 3.4%, largely due to shelter and gasoline costs.

The economy added 303,000 jobs in March, well above the anticipated 200,000. Unemployment fell to 3.8%, against an expected 3.9%.

Retail sales rose 0.6% in February, below the anticipated 0.8% gain. Such a modest increase suggests a potential slowdown in consumer spending. Annual retail sales grew 1.5% for the year to February, ahead of the anticipated 1% increase.

Composite PMI fell marginally to 52.1 in March just below the anticipated 52.2, and despite this fall it represents an uptick in factory activity. Consumer sentiment increased to 79.4 in February, reflecting a rosier outlook on inflation and business conditions.

The trade deficit widened to US$68.9 billion in February, above the anticipated US$67.3 billion.

Euro area 

The European Central Bank (ECB) maintained its interest rates at 4.5% during its March meeting as policy makers try to balance concerns over a looming recession with elevated underlying inflationary pressures.

The inflation rate for March came in at 0.8%, below market expectations of 0.9%, keeping the annual rate steady at 2.4% (versus the expected 2.6%). The ECB has projected inflation to average 2.3% in 2024, 2.0% in 2025 and 1.9% in 2026.

The unemployment rate came in at 6.5% in January, just above the market forecast of 6.4%.
Retail sales fell 0.5% in February, just above the expected -0.4%. Annual retail sales fell 0.7%, better than the anticipated -1.3%. Consumer confidence rose to -14.9 in March as consumers are gradually brightening their views on both their personal and general economic situations.

The Composite PMI rose to 49.9 in March, the highest in nine months, and indicating a near-stabilization of business activity.

UK 

The Bank of England maintained the bank rate at 5.25% in its March meeting as policymakers wait for clearer signals that the country’s persistent inflationary pressures have subsided.

Annual CPI fell to 3.4% in February with the Bank projecting inflation to fall below 2% in Q2 2024.

Composite PMI edged down to 52.9 in March, from 53 in February and just below the expected 53.1. Even so, this was the fifth month of expansion in the private sector thanks to a solid rate of increase in output. Service sector growth was quicker than that seen in the manufacturing sector, despite losing momentum in March.

Consumer confidence was unchanged at -21 in March, below the expected -19, as cost of living concerns continue to dampen sentiment.

China 

China’s unemployment rate increased to 5.3% in February, higher than the previous month, but below the 5.5% government target.

Composite PMI was at 52.7 in March, the highest reading in ten months, and both manufacturing and services activity expanded. Business sentiment has improved for both manufacturers and services providers with the measures introduced earlier in the year to stabilise growth gradually having an effect.

Annual retail sales grew 5.5% in the January-February period, above the market expectation of 5.2%.

Profits from industrial firms rose 10.2% for the first two months of 2024 compared to last year. Coupled with better-than-expected growth in retail sales, exports and factory output for the same period suggests that, aside from the still-struggling property sector, the Chinese economy is gradually recovering.

Japan 

The Bank of Japan (BOJ) raised its cash interest rate, which had been -0.10% since 2016, to between zero and +0.10%. The BOJ also opted to officially end its “Yield Curve Control” policy of buying government bonds to maintain yields below a cap of 1.0%.

These moves were generally anticipated by financial markets and the accompanying commentary was at the “dovish” end of expectations, particularly assurances that “accommodative financial conditions would be maintained for the time being.”

The Japanese equity market rose, and the yen fell on the news, suggesting that more substantial monetary tightening measures had previously been priced in.

Producer inflation came in at 0.8% over the year to March, meeting expectations and marking the strongest reading since October 2023.

Currencies 

The Australian dollar (AUD) appreciated over the month of March, closing 0.7% higher in trade weighted terms to 61.5, appreciating against the Japanese Yen (JPY), US Dollar (USD), Pound Sterling (GBP) and Euro (EUR).

The AUD emerged as the top performer among G10 currencies in March, propelled by robust market sentiment that pushed global equities to record highs. The AUD surged to its highest point in two months, following the release of a strong Australian February employment report. Despite a discernible downtrend in the latter part of the month, the AUD managed to secure its first monthly gain against the USD for 2024.

Relative to the AUD, the GBP depreciated the least during the month, closing 0.3% lower. The laggard of the month was the JPY, depreciating in relative terms against the AUD by 1.2%. Year-on-year, the AUD remains behind the GBP, EUR, and USD by -4.8%, -2.1% and -2.5% respectively, whilst ahead of the JPY by 11.1%.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.

Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.

Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).

Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.

For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).

Month in Review as at February 2024

Index returns at February 2024 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.

Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Key Points

• The Australian market had another positive month in February, finishing 0.8% higher. Leading the market higher were Information Technology (I.T.) (+19.5%), Consumer Discretionary (9.2%) and Property (+5.1).
• Overseas markets also finished the month higher, with emerging markets outperforming developed markets. The CSI 300 and Heng Seng rebounded strongly after hitting five-year lows at the beginning of the month.

Australian equities 

In February, the ASX 200 index continued its upward trend for the fourth consecutive month. The index saw a modest increase of 0.8%. Among the eleven sectors, five experienced gains. Notable sectors were Information Technology (I.T.) (+19.5%), Consumer Discretionary (9.2%) and Property (+5.1%), with their returns leading the market. Meanwhile, Energy (-6.0%), Materials (-5.0%) and Health Care (-2.7%) suffered declines, tempering the overall index performance during the month.

Local I.T. stocks had a stellar month, driven by the Artificial Intelligence-led rally in mega-cap U.S. tech names. Altium shares rose 31.5% after a takeover bid was recommended by its board of directors. Consumer Discretionary gained momentum due to surprisingly strong earnings reports from some of its constituents. Despite seemingly weak consumer sentiment, retailers reported stable margins despite price discounts, which buoyed share prices.

Among the laggards, Energy experienced the most significant decline after disappointing earnings reports were posted. Materials continued their slide as iron ore prices reached their lowest level since October 2023, primarily due to weak Chinese steel demand.

Global Equities 

Global equity markets continued to rally in February with no sign of slowing down as strong earnings data pushed markets higher. Emerging markets outperformed developed markets, returning 6.4% (MSCI Emerging Markets Index (AUD) versus a 5.9% return (MSCI World Ex-Australia Index (AUD).

All major indices closed at a record high in the US. A strong reporting season supported growth with 73% of S&P 500 companies beating earnings projections. The Nasdaq Composite gained 6.2% (in local currency terms) in February, while the S&P 500 gained 5.3% (in local currency terms) extending its now four-month winning streak.

Similarly in Japan, the Nikkei 225 Index smashed its 1989 all-time high, gaining 8.0% for the month (in local currency terms), bolstered by strong earnings results, a weaker Japanese Yen and corporate governance reforms aiming to boost shareholder returns.

The CSI 300 and Heng Seng rebounded 9.4% and 6.6% (in local currency terms), respectively after sinking to five-year lows at the beginning of the month. The rebound came after the central bank cut the benchmark lending rate by the most on record and China’s securities regulator tightened controls on “market disruption”.

Property 

The S&P/ASX 200 A-REIT Accumulation index continued its strong start to the year in February, finishing the month 5.1% higher. Conversely, global real estate equities (represented by the FTSE EPR/NAREIT Developed Ex Australia Index (AUD Hedged)) continued to regress, returning -0.1% for the month. Australian infrastructure started the year negatively, with the S&P/ASX Infrastructure Index TR returning -0.7% in February.

In the month of February, M&A activity was relatively muted as companies reported their half-year results. Some notable half-year announcements included Dexus (ASX: DXS) reporting that net tangible assets had decreased by $903m driven by property devaluations of $687m. GPT Group (ASX: GPT) reported revenues and other income were down 65.2% for the year, resulting in a net loss of $240m. Charter Hall Group (ASX: CHC) guided that FY24 distribution per security is set for 6% growth over FY23 distribution.

The Australian residential property market experienced an increase of +0.6% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth was the biggest riser (+1.8%), followed by Adelaide (+1.1%) and Brisbane (+0.9%). In contrast, Melbourne (+0.1%) was the worst performer during February.

Fixed Income 

The Reserve Bank of Australia has resolved to maintain the cash rate steady at 4.35% following their monthly monetary policy meeting. However, board members stated they would not rule out future interest rate hikes if inflation proves to be more persistent. Minutes from the 5 February meeting also revealed that while the Board acknowledged there had been progress towards inflation objectives, more progress was required, and the outlook remained uncertain.

Over the course of the month, Australian 2-Year and 10-Year Bond yields rose by 11bps and 12bps respectively, while the Bloomberg AusBond Composite 0+ Yr Index was down -0.3% over the course of February. The Statement of Monetary Policy report published by the RBA stated that economic growth in Australia is expected to remain subdued in the near term, and inflation continues to moderate and is expected to return to the target range of 2-3% in 2025.

In the U.S. the Federal Reserve announced that it would again maintain the overnight federal funds rate at 5.25-5.5% for the fourth meeting straight. Markets have priced in another hold in their March meeting. US Treasury notes yields rose, with 2-year and 10-Year Treasury yields rising 42 and 34 bps respectively.

UK GDP contracted 0.3% in the last quarter of 2023, confirming a recession, although by historical standards the recession is likely to be shallow and short-lived. The Bank of England has also decided to hold rates steady at 5.25% and in February the U.K 2-Year and 10-Year Gilt yields rose 36 and 42 bps respectively.

Economic key points 

• Australian inflation fell to 3.4% in January.
• The USA saw higher than expected inflation at 3.1%, further discounting the possibility of interest rate cuts before June.
• The RBA left rates at 4.35% in the first meeting of the year but did not rule out further rate rises in 2024.

Australia 

The RBA left rates at 4.35% in their first meeting of the year, with Governor Michele Bullock commenting that she was yet to be convinced that inflation was on a sustainable downward path, and therefore could not rule out further interest rate rises. The RBA’s base forecast is now for inflation to only return to the midpoint of its 2-3% target range in 2026. Inflation further retreated to 3.4% in January, below the expected 3.6%.

GDP for 2023Q4 came in at 1.5%, slightly ahead of the expected 1.4%. The unemployment rate rose to 4.1% in January suggesting that the economic slowdown is now feeding into the jobs market. Job vacancies fell 5.6% in Q42023 to a total of 387,900 and bringing the annual fall in job vacancies to 13.4%.

The Westpac-Melbourne Institute Index of Consumer Sentiment jumped to 86 amid easing inflation and optimism that the Reserve Bank of Australia has concluded its tightening campaign. Retail sales rose 1.1% in January, matching market estimates, with the annual rate also increasing 1.1%.

Composite PMI rose to 52.1 in February, signifying the first growth in private sector output since September 2023. The NAB business confidence index rose to 1 in January, with manufacturing and construction mainly supporting the improvement while wholesale and retail sentiment fell. The trade surplus increased to $11.03 billion in January, below the market forecast of $11.5 billion.

US 

Higher than expected US inflation led investors to further discount the possibility of interest rate cuts before June. Headline inflation growth was +3.1% for the year to January 2024, compared to expectations of +2.9%, with rising rent costs accounting for most of the increase. While inflation has eased considerably from its +9.1% peak in 2022 it has not slowed since mid-2023, staying around 3%.

The economy added 275,000 jobs in February, well above the anticipated 195,000, however unemployment rose to 3.9%, against an expected 3.7%.

Retail sales dropped 0.8% in January, below the anticipated 0.1% fall, primarily driven by the aftermath of holiday shopping and colder weather. Annual retail sales grew 0.8% for the year to January, well below the +5.8% in December.

Composite PMI increased to 52.5 in February, up from 52 in January. It was the highest reading since June 2023, as manufacturing production saw a boost while service sector activity also rose. Consumer sentiment fell to 76.9 in February, reflecting weaker expectations for income and business conditions, and rising worries over the job market.

The trade deficit widened to US$67.4 billion in January, well above the anticipated US$63.5 billion.

Euro area 

Annual inflation declined to 2.6% in February, slightly above the 2.5% market expectation. PPI fell 0.9%, with the annual rate dropping to 8.5% as energy prices continued to fall.

The unemployment rate came in at 6.4% in January, matching market forecasts. Retail sales rose 0.1% in January, as anticipated. Annual retail sales fell 1.0%, marking the 16th month of contraction. Consumer confidence rose to -15.5 in February thanks to reduced negative views on household finances.

The Composite PMI rose to 49.2 in February, the highest in eight months, with service sector activity showing growth for the first time since July of last year.

UK 

A marginal decline in 4th quarter GDP of 0.3% confirmed that the UK economy slipped into technical recession at the end of 2023. This data is expected to allow the Bank of England to begin cutting interest rates in the second half of this year.

The UK’s inflation rate held steady at +4.0% for the year to January, compared to concerns that it would accelerate to +4.2%. However, it remains double the Bank of England’s target of 2.0%.

Producer input prices fell by 3.3% in the year to January, down from 2.1% in the year to December. Producer output (factory gate) prices fell by 0.6% in the year to January, down from a rise of 0.1% in the year to December.

PMI came in at 53.0 in February, indicating a robust expansion in private sector output, marking the swiftest growth since May 2023. Notably, service sector activity continued to exhibit strong growth, while the contraction in manufacturing output eased to its slowest pace in three months.

Consumer confidence unexpectedly fell to -21 in February, below forecasts for -18, retreating amid weaker readings on personal finances and the broader economic outlook. Retail sales rebounded 3.4% in January, double the market forecast of a 1.5% rise. Annual sales grew 0.7%, surprising the market which expected a 1.4% decline.

China 

The Chinese economy grew by a seasonally adjusted 1.0% in 2023Q4, matching market expectations but moderating from an upwardly revised 1.5% increase in Q3. The government has set a modest 5% growth target for 2014, amid an economic slowdown and dwindling business sentiment. China’s economy grew by 5.2% last year, but this incorporated a substantial rebound from the COVID-zero policies of 2022, and many investors expect further policy support will be needed to maintain that growth rate, and for currently negative CPI inflation to recover towards the government’s +3% target.

The unemployment rate increased to 5.2% in January, higher than the 5.1% in December, but below the 5.5% government target.

China’s consumer prices rose by 0.7% year on year in February, the highest level in 11 months due to robust spending during the Lunar New Year holiday.

PPI was unchanged at -0.2% in February, bringing the annual rate to -2.7%, above the expected -2.5%. This is the 17th straight month of contraction in factory gate prices, underscoring that the economy continued to grapple with numerous headwinds as various support measures from Beijing to speed up recovery since last year apparently had little effect.

Composite PMI was unchanged at 50.9 in February, with services expansion offset by the continued contraction in manufacturing. It is worth noting that PMI readings in February are less reliable due to the distortion from the Lunar New Year break, making it difficult to get a clear picture of economic momentum, particularly for the manufacturing sector.

Annual retail sales grew 7.4% in December, below the expected 8% and under the previous month’s 10.1% growth, amid a slowing demand for communications equipment and cars.

A trade surplus of US$125.16 billion was recorded in January-February, well above the expected US$103.7 billion surplus.

Japan 

GDP rose 0.1% in the December quarter, compared with flash data of a 0.1% fall and a 0.8% contraction in Q3, and narrowly escaping a recession. The annual inflation rate dropped to 2.2% in January as food price roses continue to moderate. The unemployment rate remained at 2.4% in January, matching the market forecast.

The consumer confidence index rose to 39.1 in February, the highest reading since December 2021 and above the forecast 38.3. Retail sales rose 0.8% in January, with the annual rate rising 2.3%, matching market forecasts. Composite PMI came in at 50.6 in February, down from 51.5 in January, but still in expansion territory amid a sustained increase in the service sector.

Currencies 

The Australian dollar (AUD) depreciated over the month of February, closing 0.5% lower in trade weighted terms to 61.1, appreciating against the Japanese Yen (JPY) whilst depreciating against the US Dollar (USD), Pound Sterling (GBP) and Euro (EUR).

The AUD fell against the USD early in the month following a much stronger-than-expected US employment report, which saw traders unwind some of the pricing for US rate cuts this year. Furthermore, the higher than anticipated US CPI pushed the USD higher, sending the AUD/USD to a three-month low during the month. The AUD was also weaker against the majority of the remaining G10 currency basket.

Relative to the AUD, the USD led the pack in February, appreciating by 1.5%. Conversely, the JPY was the laggard of the month, depreciating in relative terms by 0.9% against the AUD. Year-on-year, the AUD remains behind the GBP, EUR, and USD by -7.8%, -5.6% and – 3.8% respectively, whilst ahead of the JPY by 6.2%.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.

Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.

Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).

Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.

For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).

Month in Review as at January 2024

Index returns at January 2024 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.

Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Key Points

• The Australian market continued its march ahead in January, finishing 1.2% higher. Gains in the market were led by Energy, Financials ex Property and Healthcare. 
• Overall, overseas markets finished higher, noting the experience in Asian markets was different with weaknesses in China and Hong Kong. 

Australian equities 

In January, the ASX 200 achieved a record high, ending the month 1.2% up. Most sectors (eight out of 11) closed the month positively. Lower-than-expected inflation for the December 2023 quarter buoyed investors. Energy (+5.2%), Financials (+5.0%), and Health Care (+4.3%) were the top performers, while Materials (-4.8%) and Utilities (-1.5%) lagged. 

Energy stocks, especially Boss Energy (ASX: BOE) and Paladin Energy (ASX: PDN), benefited from positive uranium market news. BOE shares were also boosted by the positive drilling results at its Honeymoon mine in South Australia. The Financials sector was lifted by the “Big 4” banks, despite mixed outlooks for their upcoming earnings. 

Conversely, Materials stocks suffered due to falling iron ore and lithium prices. Lithium miners had a tough January as supply outstripped demand, attributed to slower electric vehicle uptake. Sayona Mining (ASX: SYA) and Liontown Resources (ASX: LTR) shares were particularly impacted by the lithium outlook, and BHP (ASX: BHP) also took a hit in January. 

As we approach February’s reporting season, the robust market of the past two months could face a downturn if earnings disappoint. 

Global Equities 

Global equity markets continued to gain despite US Federal Reserve Chairman Jerome Powell noting rate cuts were unlikely in March. The S&P500 rose 1.7% (in local currency terms) while similarly the Nasdaq 100 rose 1.9% (in local currency terms) despite a disappointing start to the Q4 earnings results season. 

Similarly, European markets posted minor gains, with the DAX 30 Index finishing up 0.9% (in local currency terms). This was despite the European Central Bank holding off on rate cuts and keeping interest rates at a record high. Chinese markets crashed to a 5-year low as manufacturing activity shrank for the fourth straight month, with the CSI 300 and Hang Seng Index dropping 6.29% and 9.16% respectively (in local currency terms), spurred further by the liquidation of property giant Evergrande by a Hong Kong court. 

Property 

The S&P/ASX 200 A-REIT Accumulation index started the year positively in January, with the index finishing the month 1.3% higher. Conversely, global real estate equities (represented by the FTSE EPR/NAREIT Developed Ex Australia Index (AUD Hedged)) regressed, returning -3.6% for the month. Australian infrastructure started the year negatively, with the S&P/ASX Infrastructure Index TR returning -1.8%. 

The Australian residential property market experienced an increase by +0.4% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth was the biggest riser (+1.6%), followed by Adelaide (+1.1%) and Brisbane (+0.9%). In contrast, Melbourne (-0.1%) was the only city to deliver negative returns in January. 

Fixed Income 

Amidst global economic uncertainty, Australian bond markets have moved cautiously in January, with investors awaiting the RBA’s February decision. The focus remains on monitoring the evolving economic conditions, particularly the interplay between a robust labor market and tempered household spending. Bond yields mirrored this cautious optimism, with the 2-Year decreasing marginally by 2bps and the 10-Year Australian Bond yields experiencing a slight increase by 6bps, as investors seek clarity on future monetary policy directions. 

Globally, the fixed income landscape remained resilient. U.S. Treasury yields saw marginal movement, with the 2-Year decreasing by 5bps and the 10-Year yields increasing by 3bps, as markets adjust to the Federal Reserve’s latest guidance on interest rates amidst a stabilized inflation outlook. Meanwhile, UK Gilts rebounded with a modest increase in yields, with the 2- and 10-Year Gilt yields increasing by 25bps and 26bps respectively, reflecting a recalibration of market expectations following the Bank of England’s rate decisions. 

Investors are navigating the early 2024 bond markets with an eye on central banks’ commitment to inflation targets and the potential impact of global economic shifts. 

Economic key points 

• Australian inflation fell to 4.1% for the December quarter. 
• Inflation fell in the UK and Eurozone but rose in the US. 
• The Fed, BoE and ECB left cash rates unchanged at their January meetings. 

Australia 

Inflation retreated to a two-year low of 4.1% in the December quarter, below the expected 4.3%. For the quarter alone, inflation rose 0.6%, half the pace of the September quarter and below the anticipated 0.8%. 

The Westpac-Melbourne Institute Index of Consumer Sentiment fell to 81 in January as a surge in the cost of living and high interest rates continue to dominate sentiment. 

Retail sales fell 2.7% in December, missing market estimates of a 0.1% rise, with the annual rate increasing 0.8%. 

Composite PMI jumped to 49 in January, still in contraction territory but services new business activity has notably stabilised. The NAB business confidence index rose to -1 in December, supported by a pick-up in the mining and retail sectors. 

The trade surplus declined to $10.96 billion in December, just below the market forecast of $11 billion. 

US 

As widely expected, the Federal Reserve kept rates on hold at 5.25-5.50% in its January meeting. The Fed said it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward the 2% target. The comments were seen as more hawkish than expected as there was no mention of near-term rate cuts. 

Annual inflation was 3.4% in December, higher than the expected 3.2%, as energy prices dropped at a slower rate. Meanwhile, PPI unexpectedly decreased 0.1% in December, mainly due to a 12.4% fall in diesel prices. The economy added 353,000 jobs in January, well above the anticipated 180,000, with the unemployment rate steady at 3.7%. 

Services PMI came in at 52.5 in January indicating that the services sector is back in expansion territory. This result, combined with extremely strong employment figures suggests that economic growth momentum has continued into the new year. This has further diminished expectations for interest rate cuts by the Federal Reserve 

Consumer sentiment rose to 79 in January, the highest reading since July 2021. 

Euro area 

The ECB maintained interest rates at 4.5% despite the steady improvement in inflation and ongoing weakness in economic activity. Governing Council member Mario Centeno took a dovish stance by commenting that rate cuts should start sooner rather than later, and in small steps rather than abruptly. Annual inflation dropped slightly to 2.8% in January, matching market expectations. 

PPI fell 0.8% in December, with the annual rate dropping to 10.6% as energy prices continued to fall. 

The unemployment rate was unchanged at 6.4% in December, matching market expectations. 

Retail sales fell 1.1% in December, marginally below the expected -1.0%, as persistent high inflation and interest rates continued to dampen demand. This was also reflected in consumer confidence, which fell 1 point to 16.1. 

The Composite PMI rose to 47.9 in January, in line with expectations, with services PMI falling to 48.4, representing the sixth consecutive contraction of activity. 

UK 

The Bank of England left rates unchanged at its January meeting and confirmed they are officially warming up to a rate cut. BoE Governor Bailey had three key messages for the market: that the upside bias for rates is gone, that “we are not there yet” with regards to inflation, and that the BoE will not speculate on the timing of rate cuts. 

Consumer confidence rose to -19 in January, as lower inflation and a national insurance rate cut buoyed sentiment. Retail fell 3.2% in December, exceeding the expected 0.5% fall. Annual sales fell 2.4%, well below the expected 1.1% growth. 

China 

China’s consumer prices fell by 0.8% year on year in January, the biggest fall in more than 14 years and worse than market forecasts of a 0.5% fall. 

PPI decreased 0.2% in January, bringing the annual rate to -2.5%, marginally above the expected -2.6%. While marking the softest drop in four months, the latest result was the 16th straight month of contraction in factory gate prices, reflecting persistent deflation forces in the economy. 

Composite PMI was 52.5 in January, marking the 13th consecutive month of growth in private sector activity. Services activity inched down to 52.7 amid a softer rise in new orders. 

Japan 

The Bank of Japan kept interest rates steady at 0.1% and maintained a 0% target for its 10-year bond yields in its January meeting. In a quarterly outlook, the BoJ slashed CPI readings for FY 2024 to 2.4% from October’s projections of 2.8%, reflecting a recent decline in oil prices. 

The annual inflation rate fell to 2.6% in December as food prices rose the least in 14 months. The unemployment rate fell to 2.4% in December, matching market expectations. 

The consumer confidence index rose to 38 in January, above the forecast 37.6, with sentiment increasing in all components. Retail sales fell 2.9% in December, with the annual rate rising 2.1%, well below the anticipated 4.7%. 

December saw Composite PMI rise to 51.5 in January, with continuing service sector growth offsetting a further easing in manufacturing production. 

Currencies 

The Australian dollar (AUD) depreciated over the month of January, closing 1.9% lower in trade weighted terms to 61.4, appreciating against the Japanese Yen (JPY) whilst depreciating against the US Dollar (USD), Pound Sterling (GBP) and Euro (EUR). 

The AUD experienced its first monthly decline against the USD since October, driven by a rebound in the USD. Tensions escalating in the Middle East and ongoing concerns over the outlook for the Chinese economy pushed the AUD lower in the first half of January. Over the remainder of the month, the AUD remained stable before depreciating on the last day of January following a softer-than-expected Australian Q4 CPI, ruling out a further cash rate increase from the RBA. 

Relative to the AUD, the USD led the pack in January, appreciating by 3.2%. Conversely, the JPY was the laggard of the month, depreciating in relative terms by 0.5% against the AUD. Year-on-year, the AUD remains behind the GBP, EUR, and USD by -9.3%, -6.3% and – 6.4% respectively, whilst ahead of the JPY by 5.2%. 

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.

Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.

Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).

Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.

For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).

Month in Review as at December 2023

Index returns at December 2023 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Market Key Points

• The Australian market had a strong month in December, finishing 7.3% higher. Leading the market higher were Property (11.5%), Healthcare (9.8%) and Materials (8.8%), while Energy and, Utilities were laggards.
• Overseas markets also finished the month higher, particularly developed markets. Emerging markets were fixed, the CSI 300 Index (CNY) finishing the month lower.

Australian equities

The ASX 200 finished December up 7.3% with all 11 sectors posting positive returns. The December ‘Santa Rally’ rang true again, with market sentiment being supported by the indications from the US Federal Reserve that interest rates have peaked. Locally, the monthly returns transpired despite the release of weak data across several economic indicators. Investors also see potential for rate cuts from central banks in 2024, and these factors contributed to the monthly return.

Leading the pack were Property (+11.5%), Health Care (+9.1%), and Materials (+8.8%) while Utilities (+2.5%) and Energy (+3.4%) finished less favourably. Property had double digit returns for the second consecutive month, as investors gave the sector buoyancy following the Fed’s dovish tone. Robust gains in the price of iron ore and other commodities were beneficial for Materials shares.

Over the year, Information Technology (+31.3%) was the top performing sector, leveraging off the advances in A.I. technology. Other sectors that finished the calendar year with robust returns were Consumer Discretionary (+22.3%), Property (+17.6%), Communications (+16.6%) and Materials (16.2%). Given the late run, at the conclusion of 2023 the ASX 200 was up 12.4%, marking a strong rebound after the negative return in 2022.

Global Equities

Global equity markets rallied into the end of the year on easing inflation data. Developed markets continued to outperform emerging markets returning 1.8% (MSCI World Ex-Australia Index (AUD)) versus a 1.0% return according to the MSCI Emerging Markets Index (AUD). The CSI 300 Index lost 1.8% (in local currency terms) in December due to investor concern on lack of stimulus from the Chinese government.

US markets continued to gain as the FOMC meeting suggested three interest rate cuts in 2024, sending the S&P500 up 4.5% (in local currency terms), while the Nasdaq rose 5.6% in December, marking a 44.6% increase for 2023 (in local currency terms).

Property

The S&P/ASX 200 A-REIT Accumulation index finished the year strongly during December, with the index finishing 11.5% higher. Global real estate equities (represented by the FTSE EPR/NAREIT Developed Ex Australia Index (AUD Hedged)) also performed well, advancing 8.4% for the month. Australian infrastructure continued its positive trend through December, with the S&P/ASX Infrastructure Index TR advancing 4.4%% for the month and 11.3% for the calendar year.

December was relatively muted on the M&A front across the A-REIT sector. Some activity included Charter Hall Retail REIT (ASX: CQR) contracting to sell $225.5mn of shopping centre assets, with the focus on maintaining balance sheet strength. In broader news Cromwell Property Group (ASX: CMW) announced new CFO, Michelle Dance, who was promoted internally. Dexus (ASX: DXS) announced their new CEO Ross Du Vernet who has been a member of the executive team since he joined in 2012.

The Australian residential property market experienced an increase of +0.4% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth was the biggest riser (+1.5%), followed by Adelaide (+1.3%) and Brisbane (+1%). In contrast, Melbourne (-0.3%) was the only city to deliver negative returns in December. CoreLogic’s five capital city aggregate returned +9.7% for the calendar year in 2023.

Fixed Income

In a move reflecting its cautionary approach towards inflation, the RBA kept the cash rate on hold at 4.35%. This pause comes after a rate hike last month and a period of assessment on inflation’s trajectory, which has shown signs of moderation, particularly in the goods sector. Despite this, the RBA acknowledges the inflation risks associated with the tight labour market and rising housing prices, emphasising its commitment to reining in inflation to target levels.

Australian bond markets reacted with restraint to the RBA’s decision. The 2-Year Bond yield edged down by 40bps, while the 10-Year yield fell by 45bps, as investors digested the mixed signals of a steady cash rate against potential inflation concerns.

In global markets, US Treasury yields continued to decline amidst softer inflation data, with the 2- and 10-Year both falling by 45bps. The Bank of England (BoE) held interest rates steady for the third consecutive meeting, as CPI dropped to 3.9%, the lowest in over two years. UK 2- and 10-Year Gilt yields declined by 62ps and 64bps respectively, suggesting market confidence in central bank policies to manage inflation.

Key Economic Points

• RBA left the cash rate at 4.35% in its December meeting.
• Other major central banks followed suit, leaving cash rates at current levels.
• Inflation was mixed, with falls in Australia and USA and increases in the UK and Euro Zone.

Australia equities

As widely expected, the RBA kept interest rates on hold at its final meeting for the year. The accompanying statement carried a less hawkish tone than other recent commentary, noting that inflation was continuing to moderate and that the expected trajectory remained consistent with RBA targets.

November’s inflation indicator came in at 4.3%, the lowest rate since January 2022 and below the anticipated. 4.4%. The most significant price rises were housing (+6.6%), food and non-alcoholic beverages (+4.6%) and insurance and financial services (+8.8).

The Westpac-Melbourne Institute Index of Consumer Sentiment rose to 82.1 in December but remains at pessimistic levels due cost of living and interest rate pressures. Retail sales rose 2% in November, well above the anticipated 1.2%, largely due to Black Friday sales.

The unemployment rate was steady at 3.9% in December, matching market forecasts. While the rate was steady, a softening of the labour market is underway with the economy shedding 106,600 full times roles, the largest drop since May 2020.

Composite PMI increased to 46.9 in December, but private sector activity remains subdued in both manufacturing output and services activity. The NAB business confidence index dropped to -9 in November, the lowest level outside the COVID period since 2012, with sentiment deteriorating in most industries.

The trade surplus increased to $11.44 billion in November, well above forecasts of $7.5 billion.

US

Following signs of easing inflation, the US Federal Reserve kept interest rates steady at its final meeting for the year, but indicated a clear willingness to reduce them in 2024. An updated “dot plot” trajectory of Fed policymaker estimates for future interest rates showed a median expectation for US cash rates to reach 4.50-4.75% by the end of next year, representing three cuts of 0.25% each, with a further four cuts anticipated in 2025.

Annual headline CPI inflation slowed to +3.1% in November, as falling fuel prices offset increases in rent. Core inflation, which excludes food and energy, also decelerated to an annualised +4.0%. Meanwhile, the PPI slowed to an annual rate of +2.5% through to November, down from +2.8% the previous month.
The economy added 216,000 jobs in December, above the market forecasts of 170,000, with the unemployment rate steady at 3.7%.

Consumer sentiment rose to 69.4 in December amid substantial improvements in outlook on inflation. Retail sales came in at 0.6% in December, the largest increase in three months and ahead of the anticipated 0.4% rise and the 0.3% increase in the prior month.

Composite PMI rose marginally to 50.9, primarily driven by the continued growth in the service sector.

The trade deficit narrowed to US$63.2 billion in November, below the forecast US$65 billion.

Euro area

The ECB maintained interest rates at 4.5% for the third month in a row in an effort to combat high inflation. The bank project inflation to average 5.4% in 2023, coming down to 2.7% in 2024. Annual inflation rose to 2.9% in December, just below the expected 3.0%.

PPI fell 0.3% in November, with the annual rate dropping to 8.8% as energy costs continued to fall, but at a slower rate than in previous months.

The unemployment rate fell to 6.4% on November, slightly below, market expectations of 6.5%. Consumer confidence rose to -15.0 in December, the highest level since February 2022 reflecting improved assessments of the general economic situation and easing inflation.

Retail sales fell 0.3% in November, matching market expectations. Annual retails sales fell by 1.1%, underscoring the impact of the ECB’s aggressive rate tightening.

The Composite PMI came in at 47.6 in December, with both services and manufacturing output declining.

UK

The Bank of England voted by a majority of 6-3 to uphold the cash rate at a 15-year high of 5.25% during its December meeting. This aligns with policymakers’ efforts to combat inflation, even in the face of a deteriorating economic landscape.

Annual inflation unexpectedly rose to 4% in December from a nearly two-year low of 3.9% in November, and above forecasts of 3.8%. It is the first increase in inflation rate in ten months, with the biggest upward contribution coming from prices of alcohol and tobacco (12.9% vs 10.2%), mainly due to a rise in tobacco duty.

PPI fell 0.6% in December, against market expectations of -0.2%, with the annual rate rising 0.1%.

Consumer confidence rose to -22 in December, as Britons became less pessimistic about their future financial situation amid easing inflationary pressures. Retail sales increased 1.3% in November, ahead of the expected 0.4%. Annual sales grew 0.1%, well ahead of the anticipated -1.3% and marks the first increase in retail activity in 19 months.

China

China’s GDP grew at an annualised rate of 5.2% for the December quarter, slightly below market expectations. Of particular concern for the local mining sector was the sharp fall in Chinese steel production to 67.4mt in December 2023, the lowest rate in 6 years and a 13% drop from the prior December. The latest data caused spot iron ore pricing to fall around 3% as investors downgraded their expectations for Chinese demand in 2024. The Australian dollar also weakened, falling back toward US$0.65 after beginning this year at US$0.68.

Other data released at the same time showed that the population declined for a second year in a row as birth rates declined at an accelerating pace. Coupled with persistently high youth unemployment (at around 14.9%), the shrinking population will have a long term effect on growth.

The unemployment rate rose to 5.1% in December. Consumer prices fell by 0.3% in December, continuing a deflation streak started in October. PPI was down 2.7% in December, above estimates of a 2.6% drop, and having declined for 15 consecutive months.

Composite PMI rose to 52.6 in December, as both services and manufacturing activity increased. This is the 12th straight month of growth in private sector activity.

Retail sales increase 0.3% in December with annual sales increasing 7.4%, missing the market consensus of 8.0%.

Japan

The Bank of Japan kept interest rates steady at 0.1% and maintained a 0% target for its 10-year bond yield set under its yield curve control policy, as expected. Policy makers continue to wait for more indications that wages are improving enough to stoke inflation.

Economic growth has fallen by 2.9% per cent since this time last year, driven by sluggish consumer demand because of 18 months of real wage decreases.

The unemployment rate was unchanged at 2.5% in November, matching market expectations.

The consumer confidence index rose to 37.2 in December with sentiment increasing in all components. Retail sales grew 1% in November, with the annual rate rising 5.3%, above the anticipated 5.0%.

December saw Composite PMI rise to 50.0, with faster service sector growth offsetting a further reduction in manufacturing production.

Currencies

The Australian dollar (AUD) appreciated over the month of December, closing 1.8% higher in trade weighted terms to 62.6, appreciating against the US Dollar (USD), Pound Sterling (GBP) and Euro (EUR) whilst depreciating against the Japanese Yen (JPY).

The AUD strengthened against the USD in December for the second consecutive month, supported by improved market sentiment in Australia and weakness in the USD. The major difference in outlook is driven by the evolution of interest rate expectations. Against other currencies, the AUD performed moderately, experiencing its first monthly decline against the Japanese yen since August amid speculation regarding a potential shift in the Bank of Japan’s monetary policy.

Relative to the AUD, the JPY led the pack in December, appreciating by 1.9%. Conversely, the USD was the laggard of the month, depreciating in relative terms by 3.1% against the AUD. Year-on-year, the AUD remains behind the GBP, EUR, and USD by -5%, -3.1% and -0.1% respectively, whilst ahead of the JPY by 7.5%.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.

Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.

Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).

Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.

For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).

Month in Review as at November 2023

Index returns at November 2023 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated)

Market Key Points

• The Australian market had a strong month in November, finishing 5.0% higher. Healthcare (11.7%) and Property (11.0%) were leaders in the market. All sectors finished higher apart from Energy, Utilities and Consumer Staples.
• Overseas markets also finished the month higher, particularly developed markets. Emerging markets were fixed, with the CSI 300 Index (CNY) and Hang Seng Index (HKD) finishing the month lower.

Australian equities

The ASX 200 was up 5.0% for the month of November, halting the three-month slide in returns. Eight of 11 sectors finished positively; the three strongest being Health Care (+11.7%), Property (+11.0%), and Information Technology (I.T.) (+7.4%), while Energy (- 7.4%) and Utilities (-6.0%) were laggards. The month began with a rate hike by the RBA and fears of further increases. However, markets were supported by indications of inflation slowing at a decent pace, finishing the month with the strongest return for the index since January. The Health Care sector was driven by a strong month for three major constituents: CSL, ResMed and Cochlear. Meanwhile, despite the RBA’s decision early in the month, the rate-sensitive Property and I.T. sectors were the beneficiaries of the ease in inflation as investors piled back into those sectors.

Energy stocks were hit by the significant drop in oil prices over the month, partly due to the Chinese economy continuing its struggles. Meanwhile, Utilities were impacted, predominantly by one stock, Origin Energy, as the unpredictable takeover bid of the company saw its shares fall almost 10%. In all, the ASX 200 finished November by clawing back some of the losses seen in the previous three months.

Global Equities

Global equity markets gained in November, rebounding from October lows. Developed markets outperformed emerging market counterparts returning 4.4% (MSCI World Ex-Australia Index (AUD)) versus a 3.1% return according to the MSCI Emerging Markets Index (AUD).

The S&P500 finished up 9.1% and the Nasdaq up 10.8% (in local currency terms) as the Federal Reserve shows signs of ending rate hikes. European markets also gained on easing inflation data, the DAX gaining 9.5% (in local currency terms) over the month.

Chinese markets performed poorly, as China’s economy continued to contract and artificially lowered iron ore prices fail to bolster the economy. The Hang Seng Index and CSI 300 Index lost -0.2% and -2.1% for the month (in local currency terms), as China’s largest property giant EverGrande continues to face collapse, dragging the Real estate Sector lower in China.

Property

The S&P/ASX 200 A-REIT Accumulation index advanced during November, with the index finishing the month 11.0% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strong, advancing 9.0% for the month. Australian infrastructure also performed well during November, with the S&P/ASX Infrastructure Index TR advancing 1.6% for the month and up 6.6% YTD.

The Australian residential property market experienced an increase by +0.6% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth was the biggest riser (+1.9%), followed by Brisbane (+1.3%) and Adelaide (+1.2%). In contrast, Melbourne (-0.1%) was the only city to deliver negative returns in November.

Fixed Income

After four months of rate hike respite, the RBA has lifted the official cash rate by 25 basis points to 4.35% following latest inflation data and economic indicators. This marks the highest cash rate level since 2011, and the RBA will continue to monitor the balance between the strong labour market and slowing household sector. Over the course of the month, bond yields fell steadily with Australian 2 and 10-Year Bond yields falling by 35bps and 52bps respectively. The Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, rose 2.97%.

Key Economic Points

• The RBA raised the cash rate to 4.35% as inflation proved more persistent than expected.
• Australian 3Q23 GDP fell short of expectations, growing only +0.2% over 2Q23 (compared to +0.4% forecast), and +2.1% compared to the past 12 months.
• Inflation appears to be easing globally, making it more likely that the next move for central bank interest rates is down, not up.

Australia

The RBA raised the cash rate by 0.25% to 4.35% on Melbourne Cup Day, the first rate hike under new governor Michele Bullock. The tone of commentary accompanying the bank’s decision suggested a lower chance of further monetary tightening and investment markets are now pricing in a 20% chance of rate cuts by the end of 2024.

October’s inflation indicator came in at 4.9%, with the most significant rises coming from housing, food, and transport. 3Q23 GDP fell short of expectations, growing only +0.2% over the June quarter (compared to +0.4% forecast). In annual terms GDP expanded 2.1%, in line with the prior quarter and ahead of market expectations of 1.8%.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell 2.6% to 79.9 in November, returning to deeply pessimistic levels as the RBA’s rate rise has put renewed pressure on family finances. Retail sales fell 0.2% in October, the first decline since June as consumers pulled back on some discretionary spending and awaited Black Friday sales. In contrast, annual sales increased 1.2%.

The unemployment rate increased to 3.7% in October, aligning with the market expectations. The Wage Price Index grew 1.3% in quarterly terms in the third quarter, meeting expectations. The reading was the highest quarterly growth in the 26-year history of the index. On an annual basis, growth rose to 4% vs 3.6% rise last quarter.

Composite PMI fell again in November to 46.2, largely driven by a sharp decline in services output. The NAB business confidence index fell to -2 in October with falls in most industries. The trade surplus came in at $7.13 billion in October, below market forecasts of $7.5 billion.

Global

During November there was further evidence of inflation easing across the world, making it more likely that the next move for central bank interest rates is down. German CPI gains slowed to +2.3% in November, while Spain’s inflation rate fell to an annualised rate of +3.2%, both below expectations.

The Hamas/Israel war entered its second month and combined with the ongoing Russia-Ukraine war provides significant headwinds for the global economy. Aside from the catastrophic human toll, these wars could affect the US and European economies via lower regional trade, tighter financial conditions, higher energy prices and lower consumer confidence.

US

The Federal Reserve kept rates at 5.5% at its November meeting, reflecting the twin focus of returning inflation to the 2% target while avoiding excessive monetary tightening. Policymakers emphasised that any additional policy tightening would consider the cumulative impact of previous interest rate hikes, the time lags associated with how monetary policy influences economic activity and inflation, and developments in both the economy and financial markets.

Annual inflation fell to 3.2% in October, below market expectations of 3.3%, as energy costs dropped 4.5% and food, housing and used car costs rose at a softer pace. PPI fell 0.5% month-over-month in October, the most since April 2020 and against market expectations for a 0.1% increase.

The economy added 199,000 jobs in November, above the anticipated 180,000, with the unemployment rate falling to 3.7%. While the economy added more jobs than expected in November, it is the second month in a row that new jobs were well below the average of 240,000 jobs per month for the past year, suggesting that the labour market is slowing.

In November consumer sentiment fell to 60.4, missing estimates for 64 and largely driven by high interest rates and persistent inflation fears. Retail sales in October fell 0.1% over the month, ahead of expectations for a 0.3% drop but a slowdown from September’s upwardly revised 0.9% rise. The annual rate increased 3.75%.

The S&P Global Composite PMI was steady at 50.7 in November as services activity showed a small uptick in the rate of growth. The trade deficit for October came in at US$64.31 billion, above the forecast US$64.2 billion.

Euro area

There was no meeting of the ECB in November, so interest rates remained at 4.5%. Annual inflation fell to 2.4% in November, well below the expected 2.7%.

PPI rose 0.2% in October, with the annual rate dropping by 9.4% as energy costs continued to fall, but at a slower rate than in previous months. Unemployment was unchanged at 6.5% in October, matching market expectations.

Consumer confidence rose to -16.9 in November reflecting improved assessments of the general economic situation and lower than expected inflation. Retail sales grew 0.1% in October, falling short of market expectations of a 0.2% rise as consumer demand remained subdued due to persistent high inflation and elevated borrowing costs. The Composite PMI rose to 47.1 in November but still represents a deterioration in economic conditions with input costs rising sharply and employment declined for the first time in three years.

UK

Inflation for October came in at 4.6%, down from 6.7% in both September and ahead of expectations of 4.8%. This fall is due in part to the reduction in energy prices following a decision by the UK energy market authority to lower the cap on household bills.

PPI fell to 0.1% in October in line with expectations, with the annual rate falling 0.6%, below the estimated 1% fall.

Consumer confidence rose to -24 in October, ahead of the anticipated -28 even as ongoing cost of living concerns continued to impact. Retail sales dropped 0.3% in October, well below the expected 0.3% rise as consumers are spending their money more cautiously. Annual sales fell 2.7%, more than the expected -1.5%.

China

Further disappointing economic data was released from China, with deflation of -0.2% in the headline CPI for the year to October. PPI was down 2.6%, having now declined for 13 consecutive months. Chinese exports contracted 6.4%, much worse than expected, and the country recorded its first ever quarterly deficit in Foreign Direct Investment as offshore companies withdrew capital.

Composite PMI rose to 51.6 in November, the steepest pace of growth since August as both services and manufacturing activity increased. Retail sales increase 0.1% in October with annual sales increasing 7.6%, above the expected 7.0%

The unemployment rate remained at 5.0% in October.

Japan

The Japanese economy shrank 0.7% in 3Q23. It was the first GDP contraction since 3Q22, amid elevated cost pressure and mounting global headwinds. CPI accelerated modestly to +2.9% in October and has now been above the Bank of Japan’s 2% target for 19 consecutive months. The country’s annual wage negotiations, due to begin in February, are expected to provide a further boost to Japan’s inflation, with large trade unions aiming for member pay rises of at least 5%. Further evidence of sustainably above-target inflation may provide the BOJ with sufficient justification to withdraw its monetary stimulus measures, which have so far kept cash interest rates negative and Japanese 10-year government bond yields below 1.0%.

The unemployment rate fell to 2.5% in October, below market expectations.

The consumer confidence index rose to 36.1 in November, with sentiment increasing in most components. Retail sales fell 1.6% in October, with the annual rate rising 4.2%, well short of the forecast 5.9%. Although the lowest figure for ten months, retails sales continue to recover from the pandemic induced slump.

Composite PMI dropped to 49.6 in November, the first contraction since December 2022, as a drop in manufacturing offset the growth in services activity.

Currencies

The Australian dollar (AUD) appreciated over the month of November, closing 2.2% higher in trade weighted terms to 61.5, appreciating against all four referenced currencies in this update.

During the month, the volatility between the AUD and US Dollar (USD) stabilised, with the key factor behind the AUD’s rebound being the widespread weakening of the USD. This trend was largely influenced by the mid-month US Consumer Price Index (CPI) release, revealing a 0.1% downside surprise in the core (excluding food and energy) measure. This outcome boosted confidence that the Federal Reserve has concluded its current tightening cycle, increasing the likelihood of rate cuts in the first half of 2024.

Relative to the AUD, the Pound Sterling (GBP) depreciated the least during the month, closing 0.3% lower. The laggard of the month was the USD, depreciating in relative terms against the AUD by 4.2%. Year-on-year, the AUD remains behind the GBP, Euro (EUR) and USD by -6.9%, -6.8% and -1.6% respectively, whilst ahead of the Japanese Yen (JPY) by 4.7%.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec). Please read the following before making any investment decision about any financial product mentioned in this document.

Disclosure at the date of publication: Lonsec receives a fee from the fund manager or product issuer(s) for researching the financial product(s) set out in this document, using comprehensive and objective criteria. Lonsec may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec services. Lonsec’s fee is not linked to the rating(s) outcome.

Lonsec does not hold the product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).

Disclosure of Investment Consulting services: Lonsec receives fees for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or product issuer for providing investment consulting services. The investment consulting services are carried out under separate arrangements and processes to the research process adopted for the review of this financial product.

For an explanation of the process by which Lonsec manages conflicts of interest please refer to the Conflicts of Interest Policy which is found at: http://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecR esearchConflictsofInterestPolicy.pdf

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

Before making an investment decision based on the rating(s) or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness. If our advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Investment Statement or Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or product issuer(s). Should the fund manager or product issuer(s) no longer be an active participant in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage of the financial product(s).

Month in Review as at October 2023

Index returns at October 2023 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Market Key Points

• The Australian market continued its decline in October finishing the month lower by 3.8% with heavy falls in Information Technology, Health Care and Industrials, with Utilities being the only sector in the black.
• Overseas markets also declined, with falls across both developed and emerging markets.

Australian equities

October saw the ASX 200 finish down 3.8%, marking the third consecutive month of negative returns. Ten out of eleven sectors finished in the red, with Utilities finishing October as the only gainer (1.7%), while Information Technology (IT) (-7.6%), Health Care (-7.2%), Industrials (-6.4%), and Real Estate (-6.1%) saw losses. Several factors have contributed to the drag on returns, including stubborn inflation, rising bond yields, tentative company earnings outlooks and ongoing geo-political tension.

Utilities benefitted as investors moved to defensives, while IT was hit particularly hard by rising government bond yields. Megaport, a constituent of the IT sector, was a significant drag, as its quarterly customer growth report concerned investors. Expectations for a November RBA rate rise were high following accelerating retail spending data and a stickier than expected inflation report. This sentiment of rising interest rates was echoed in the yield-sensitive Real Estate sector as it saw a significant downturn.

Global Equities

Global Equities had another negative month across the board. Developed markets outperformed their emerging market counterparts, returning -1.0% (MSCI World Ex- Australia Index (AUD)) versus a -2.0% return according to the MSCI Emerging Markets Index (AUD).

Investor concerns continue around interest rates remaining higher for longer. US equities declined following the Federal Reserve’s stance of a “restrictive” policy until inflation seems to ease. This saw the S&P500 Index decline by -2.1% (in local currency terms) during the month. The same concerns were raised in the UK, also holding interest rates at 15-year historical highs. The FTSE 100 Index returned a loss of -3.7% (in local currency terms) for the month.

Equities across Asia were also predominantly negative. China’s economic growth recovery plans have seen a relative slowdown, due to headwinds in the real estate sector and investor pessimism around the levels of Government involvement. This was reflected by the CSI 300 Index, which returned -3.1% (in local currency terms) for the month.

Property

Local and Global REITs continued to sell off during October. Domestically the A-REIT index (represented by the S&P/ASX 200 A-REIT Accumulation Index) ended the month –5.8% lower. Global REITS (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) slightly outperformed the local REIT index, albeit still experiencing a significant drawdown of –4.4% during the month. Australian infrastructure finished lower through October, with the S&P/ASX Infrastructure Index TR returning –3.1% for the month.

October saw some activity on the M&A front across the A-REIT sector. Mirvac (ASX: MGR) entered into an agreement to acquire land lease operator Serenitas for $643mn. The acquisition expands Mirvac’s residential offering and makes them one of the largest owners in the land lease community sector. Centuria Industrial REIT (ASX: CIP) announced the divestment of two assets for a combined value of $70 during the first quarter of FY24. Dexus (ASX: DXS) announced that long standing CEO Darren Steinberg will step down after 11 years in the role in 2024 and are yet to announce a replacement.

The Australian residential property market experienced a +0.9% change month on month represented by Core Logic’s five capital city aggregate. Perth (+1.6%), Brisbane (+1.4%) and Adelaide (+1.3%) were the best performers. Notably, all five cities experienced positive change month on month through October.

Fixed Income

Michele Bullock has kept the cash rate at 4.10% in her first meeting as Governor of the RBA. The month saw bond yields rise, with Australian 10 and 2-Year Government Bond yields rising by 44bps and 37bps respectively. Unsurprisingly the Bloomberg AusBond Composite 0+ Yr Index returned -1.85% and the Bloomberg AusBond Credit 0+ Year Index AUD returned -0.77% over the month. The Australian economy has remained strong, meaning inflation has been slower to fall. Another rate hike is priced in for the RBA’s November Cup Day meeting.

Yields in the US continued to rise this month with US 10-Year Treasury note yields rising 36bps and 2-Year Treasury note yields rising 5bps. Strong economic data has kept central banks hawkish, and a peak this month in yields represented the highest yields for US 10-Year Treasury since 2007. However, the strong job market has maintained higher consumer spending levels and future rate hikes may lead to further rate hikes from the Fed.

Key Economic Points

• The RBA maintained the cash rate at 4.1%, but higher than expected inflation and retail sales in September indicate a rate rise in November.
• The US GDP for 3Q23 was 4.9%, contrasting with the Eurozone’s -0.1% for the same period.
• Eurozone inflation dropped unexpectedly to 2.9%, with the US steady at 3.7%. The UK remains the outlier with a stubbornly high rate of 6.7%.

Australia

The RBA held the cash rate at 4.1% in October, however higher than expected inflation and retail spending data in September increases the likelihood of a rise in November. Inflation for the September quarter rose to 1.2%, with the annual rate registering 5.4%, down from 6.0% in the previous quarter. The most significant price rise for the quarter was 7.2% in automotive fuel, the biggest rise since March 2022, which included the start of the war in Ukraine.

The Westpac-Melbourne Institute Index of Consumer Sentiment rose to 82 in October, but optimism remains in short supply in the face of persistently high inflation and renewed rate rise concerns. The unemployment rate fell to 3.6% in September, slightly below market expectations. Retail sales increased by 0.9% in September, largely due to a warmer than usual start to Spring, while annual sales rose 2.0%.

The composite PMI fell to 47.6 in October, driven by a solid decline in private sector activity. The NAB business confidence index also fell to 1 in September, well below average.

The trade surplus came in at a 30-month low of $6.79 billion in September, well below market forecasts of $9.4 billion.

Global

In its World Economic Outlook, the IMF revised down its forecast for global growth in 2024 to 2.9%, with the 2023 figure remaining at 3.0% – both below the 3.8% historical average. Advanced economies are expected to have growth rates of 1.5% in 2023 and 1.4% in 2024, amid stronger-than-expected US momentum but weaker-than- expected growth in the euro area. Emerging market and developing economies are projected to grow 4.0% in both 2023 and 2024, with a downward revision of 0.1% in 2024, reflecting the property sector crisis in China.

US

GDP growth for 3Q23 came in at 4.9%, well ahead of expectations and the prior quarter result, with consumer spending rising the most since 4Q21, led by housing and utilities. Annual inflation was steady at 3.7% in September, slightly above market expectations of 3.6%, as a softer decline in energy prices offset slowing inflationary pressures in other categories.

The economy added 150,000 jobs in October, below the anticipated 180,000, with the unemployment rate rising to 3.9%. The labor market is slowly cooling as several strikes including from members of the United Auto Workers union weighed on manufacturing payrolls.

Consumers remain unsure about the economic outlook with confidence dropping to 63.8 in October. Retail sales in September increased 0.7%, well above the 0.3% forecast, with the annual rate increasing 3.75%.

The S&P Global Composite PMI rose to 50.7 in October, a marginal increase on the previous month, despite fragile demand conditions.

The trade deficit widened to US$65.1 billion in September, above the forecast US$59.9 billion deficit.

Euro zone

The European Central Bank maintained the main interest rate at 4.5% at its October meeting, pausing at a 22-year high following ten consecutive rate hikes since July 2022. GDP shrank by 0.1% in 3Q23 while annual inflation slowed to +2.9% for October, its lowest rate since mid-2021. This suggests that the ECB is almost certainly finished raising interest rates.

PPI fell to 0.5% in September, with the annual rate dropping by 12.4% as energy costs continued to fall. Unemployment rose to 6.5% in September, above the market forecast of 6.4%.

Consumer confidence dropped to -17.9 in October, as continued sticky inflation eroded purchasing power. Retail sales fell 0.3% in September, exceeding the market expectations of 0.2%, suggesting that consumer demand is continuing to face challenges due to high interest rates and sticky inflation. The Composite PMI was lower at 46.5 in October, with a pronounced deterioration in the services sector.

UK

UK annual inflation remained at 6.7% in September, above the expected 6.6%, with core inflation dropping to 6.1%. Both these figures remain significantly above the Bank of England’s 2% target, further complicating the task for policymakers who are expected to keep interest rates unchanged in November.

PPI fell to 0.1% in September, compared to market expectations of a 0.2% decline. Consumer confidence fell sharply to -30 in September as the high cost of living and economic uncertainty weighed on sentiment. Retail sales dropped 0.9% in September, against an anticipated 0.2% fall. Annual sales fell 1.0%, more than the expected -0.1%.

China

The Chinese economy expanded by 4.9% in 3Q23, beating market forecasts of 4.4% and offering hopes that it will meet the official annual target of around 5% this year, as sustained stimulus from Beijing offset the impact of a prolonged property crisis and weak trade.

Chinese manufacturing data for October was well below market expectations. Both the official government and private Caixin/S&P Global manufacturing purchasing managers’ indices fell below 50, returning to a contraction of activity. The Chinese government’s non-manufacturing PMI also fell in October, indicating a slowdown in the construction and broader services sectors.

The unemployment rate improved to 5.0% in September, the lowest figure for nearly two years.

Annual inflation remained unchanged at 0% in September, ahead of the anticipated 0.2%. Annual retail sales grew 5.5% in September, exceeding market estimates of 4.9%. This is the ninth consecutive month of increases and the highest in four months.

Japan

The Bank of Japan modified its yield curve control policy, but not as much as investors had expected. The central bank had maintained a 1.0% upper limit on the 10-year government bond yield since July, but has now withdrawn its pledge to defend that level with unlimited bond buying, which leaves it more as a loose reference point rather than a rigid cap. The annual inflation rate fell to 3.0% in September, below the market forecast of 3.1%. This is the lowest reading in a year and core inflation dropped to a 13-month low of 2.8%.

The unemployment rate fell to 2.6% in September, in line with market expectations. The consumer confidence index rose to 35.7 in October, with sentiment increasing in most components. Retail sales fell 0.1% in September, with the annual rate rising 5.8%, just below the forecast 5.9%. The composite PMI came 50.5 in October, while this represents the tenth month of expansion, it is the weakest reading.

Currencies

The Australian dollar (AUD) depreciated over the month of October, closing -1.5% lower in trade weighted terms to 60.2, depreciating against all four referenced currencies in this update.

The fluctuations in the AUD throughout the month were linked to various factors, including the distressing events in the Middle East, US 10-year bond yields reaching their highest levels since 2007, adjustments in RBA interest rate hike predictions prompted by Q3 CPI data, and the S&P500 following the correction in Hong Kong and China stock markets.

Relative to the AUD, the Euro (EUR) led the pack in October, appreciating by 1.5%. Conversely, the Japanese Yen (JPY) was the laggard of the month, albeit appreciating in relative terms by 0.1% against the AUD. Year-on-year, the AUD remains behind the Pound Sterling (GBP), EUR and USD by -6.4%, -7.3% and -0.9% respectively, whilst ahead of the JPY by 1.0%.

Important notice: This document is published by Lonsec Research Pty Ltd ABN 11 151 658 561, AFSL No.421445 (Lonsec).

Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is a “class service” (as defined in the Financial Advisers Act 2008 (NZ)) or limited to “General

Advice” (as defined in the Corporations Act 2001(Cth)) and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (‘financial circumstances’) of any particular person. It is not a “personalised service” (as defined in the Financial Advisers Act 2008 (NZ)) and does not constitute a recommendation to purchase, redeem or sell the relevant financial product(s).

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Month in Review as at September 2023

Index returns at September 2023 (%)

Data source: Bloomberg & Financial Express. Returns greater than one year are annualised.
Commentary regarding equity indices below references performance without including the effects of currency (unless specifically stated).

Market Key Points

• During September, the Australian equity market declined by 2.8%. Most sectors finished the month lower, except for Energy (+1.6%). Property (-8.6%), Information Technology (-7.9%) and Health Care (-6.2%) had the biggest declines in Australia.
• Overseas markets also declined, except for the FTSE 100 Index (GBP), which finished 2.4% higher. While acknowledging recent volatility, most global equity markets have generated moderate to strong returns over the one-year period.

Australian equities

The ASX 200 finished September down 2.8%, reflecting the losses seen globally. Energy was the only gainer (1.6%), with all the other 10 sectors finishing the month in the red. The largest drops were seen in Real Estate (- 8.6%), Information Technology (-7.9%), and Healthcare (-6.2%). However, Australian equities did manage to outperform some global markets.

Energy was the lone bright spot in the market, returning 1.6%, riding the tailwinds of rising global oil prices. In terms of laggards, the Real Estate sector was hit hard with an 8.6% drop, reflecting the “higher-for-longer” rhetoric regarding interest rates, and the potential impact on property values.

Given the potential impact of interest rates on high growth tech stocks, IT was another sector seemingly hampered by the hawkish sentiment in September, suffering losses of 7.9%. This mirrored the sell-off in US tech giants such as Apple, Nvidia, and Amazon.

Global equities

Global equities had a negative month, with September typically being the worst performing month historically for stocks. Emerging markets outperformed developed market counterparts returning -2.3% (MSCI Emerging Markets Index (AUD)) versus a -4.0% return according to the MSCI World Ex-Australia Index (AUD).

Continued negative economic data in September saw another rise in bond yields and a decrease in equity markets, with inflation falling slower than expected, primarily due to rising energy costs. US equities stumbled amid an interest rate hold and the prolonged possibility of a government shutdown, recording one of its worst months for the year with the S&P500 Index declining -4.8% (in local currency terms) during the month.

The UK was one of the few positive performers for the month, with the FTSE 100 Index returning a gain of 2.4% (in local currency terms). This was driven by a decrease in domestic core inflation and surprising GDP data above expectations. The Bank of England also kept interest rates on hold.

Property

The S&P/ASX 200 A-REIT Accumulation index finished September lower after consecutive positive months in July and August, with the index finishing the month – 8.6%. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also fell, returning –5.3% for the month. Australian infrastructure finished lower through September, with the S&P/ASX Infrastructure Index TR returning -1.6% for the month.

In the month of September, M&A activity was relatively quiet. BWP Trust (ASX: BWP) announced the divestment of their Wollongong property to an unrelated third party for $40mn. In broader news Charter Hall (ASX: CHC) announced their new CFO, Anastasia Clarke, following the resignation of former CFO Russel Proutt. Cromwell Property Group (ASX: CMW) announced the resignation of their CFO Michael Wilde and are yet to announce a replacement.

The Australian residential property market experienced an increase by +0.9% Month on Month (as represented by CoreLogic’s five capital city aggregate). Adelaide was the largest riser (+1.7%), followed by Brisbane and Perth (both +1.3%). All five capital cities performed positively for the fifth consecutive month with Melbourne (+0.4%) being the worst performing city. Over the one-year period, Perth was the largest gainer (+8.8%).

Fixed Income

In his final meeting as RBA Governor, Phillip Lowe kept the cash rate on hold at 4.10% for the third month running. This month’s meeting signifies Lowe’s final monetary policy decision hand down, with his seven-year term not being renewed. During his term, Lowe and the RBA board cut rates to a historic 0.1 percent, and subsequently hiked rates 12 times in a bid to control inflation. Lowe’s successor, Michele Bullock, took over the role on September 17.

The month saw a sharp repricing of bond markets with yields rising to cycle highs. Australian 2- and 10- Year Bond yields rose 25bps and 46bps respectively, and the Bloomberg AusBond Composite 0+ Yr Index returned – 1.53%. Despite inflation rates falling and economic data showing a slowing economy, bond markets appear to be repricing due to concerns central banks are expected to maintain higher interest rates for a prolonged period.

The story was similar in the US, with the Federal Reserve holding the target cash rate steady at 5.25%- 5.50% citing easing inflation pressures and concerns of slowing economic growth. Despite the rate hike respite, bond markets experienced a poor month, correlating positively with equity markets. US 2- and 10- Year Treasury yields rose 18bps and 46bps respectively, and the Bloomberg Barclays Global Aggregate Index (AUD) returned -2.58% over the course of the month.

Key economic points

• RBA maintained the cash rate at 4.1% but reiterated that inflation is still too high.
• The Fed and Bank of England held cash rates at 5.5% and 5.25%, respectively.
• The ECB bucked the trend by raising rates to 4.5%.

Australia

The RBA held the cash rate at 4.1% in September, reserving the need for increases in the coming months to ensure that inflation returns to target in a reasonable timeframe. Inflation unexpectedly rose to 5.2% in August with the most significant rises in housing, transport, food and insurance.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell to 79.7 in September, with pessimism persisting, despite easing fears of further interest rates. The unemployment rate was steady at 3.7% in August, matching market forecasts. Retail sales increased by 0.2% in August, below the market estimate of 0.3%, while annual sales rose 1.5%. These figures indicate that consumers continue to rein in spending as interest rates remain elevated.

Composite PMI increased to 50.2 in September, the highest figure in four months, indicating a return to expansion for the private sector. The NAB business confidence index came in at 2 in August with sentiment mixed across industries and falling sharply in mining.

Global

The World Bank has maintained its forecast for China’s 2023 economic growth at 5.1% in line with its previous estimate in April. Their predictions were trimmed for 2024 to 4.4 per cent from 4.8 per cent, citing the persistent weakness of its property sector.

US

The US Federal Reserve held interest rates steady at 5.25- 5.5% but released an updated “dot plot” for their future trajectory which proved more hawkish than previous expectations. Many policymakers anticipate one further 0.25% increase in the remainder of 2023, and the median expectations are for only 0.5% in rate cuts through calendar 2024, compared to double this level indicated in the last dot plot. Accompanying commentary confirmed that the Fed now sees the battle to return inflation to its 2% target stretching out to 2026. Annual inflation rose to 3.7% in August, above the expected 3.6%.

The US economy added 336,000 jobs in September, nearly double the anticipated 170,000. The unemployment rate was static at 3.8% in September. The labour market remains tight, adding leeway for the Federal Reserve to leave borrowing costs at restrictive levels for a prolonged period.

Consumers remain unsure about the economic outlook with consumer confidence edging up to 68.1 in September, but below the high of 71.6 in July. Retail sales in August increased 0.6%, beating the 0.2% forecast, with the annual rate increasing by 2.5%. The S&P Global Composite PMI fell to 50.1 in September, the fourth consecutive decline, suggesting broad stagnation in the private sector. The trade deficit narrowed to US$58.3 billion in August, better than the forecast US$62.3 deficit.

Euro zone

The European Central Bank raised interest rates to 4.5%, the 10th consecutive rise. This signals a possible end to policy tightening, as inflation has started to decline but is still expected to remain too high for too long.

Annual inflation fell to 4.3% in September, below the market consensus of 4.5%. The ECB forecasts average inflation at 5.6% in 2023 and 3.2% in 2024, both higher than previous estimates, primarily due to an elevated path for energy prices. PPI rose 0.6% in August, in line with market expectations, with the annual rate falling 11.5% as energy costs continue to fall.

Unemployment came in at 6.4% for August, matching the market forecast. Consumer confidence dropped to -17.8 in September, as households remain pessimistic about both their own and the wider economic outlook. Retail sales dropped 1.2% in August, compared with market expectations of -0.3%, with the annual rate down 2.1%, below the anticipated -1.2%. The Composite PMI rose to 47.1 in September, with a steep contraction in the manufacturing sector.

UK

The Bank of England held rates at 5.25% in September as policymakers opted for a wait-and-see approach, with inflation and labour data suggesting the accumulated impacts of previous policy tightening might be taking effect.

Annual inflation eased to 6.7% in August, below the expected 7.0%, primarily due to the slowdown in food inflation. PPI fell by 0.4% in August, compared to market expectations of a 0.6% decline.

 The unemployment rate increased to 4.3% in July, slightly above expectations, indicating that the labour market may be cooling off after months of unprecedented monetary policy tightening by the Bank of England.

Consumer confidence rose to -21 in September, above the expected -.27, amid growing optimism about the economy and easing pressures on household spending. Retail sales rose 0.4% in August, just below the market forecast of a 0.5% increase. Annual sales fell by 1.4%, more than the expected 1.2%.

The composite PMI index fell to 46.8 in September, driven by the continued contraction in manufacturing and a steep decline in the services sector.

China

The unemployment rate dropped to 5.2% in August, matching June’s 16 month low of 5.2%.

Annual inflation came in at 0.1% in August, below market expectations of 0.2%, with core inflation increasing 0.8%. Annual Retail sales grew 4.6% in August, exceeding market estimates of 3.0%.

Composite PMI fell to 50.9 in September, as new orders rose at a softer pace with manufacturers and service providers recording only marginal increases in sales.

This suggests the downturn in growth may be stabilising, but real estate remains a weak spot in the economy with property investment falling 8.8% in 2023.

Japan

The Bank of Japan maintained its key short-term interest rate at -0.1% and that of 10-year bond yields at around 0% in its September meeting by unanimous vote.

The annual inflation rate fell marginally in August to 3.2% just below the market forecast of 3.3%.

The unemployment rate was unchanged at 2.7% in August, above the market prediction of 2.6%.

The consumer confidence index dropped to 35.2 in September, with sentiment dropping across all components. Retail sales rose 0.1% in August, with the annual rate rising 7.0%, above the forecast 6.6%.

The composite PMI came in at 52.1 in September as services activity grew the least in eight months, while factory output fell at the fastest pace for three months.

Currencies

The Australian dollar (AUD) appreciated over the month of September, closing 0.8% higher in trade weighted terms to 61.1, strengthening against the Pound Sterling (GBP), Euro (EUR) and the Japanese Yen (JPY) whilst depreciating against the US Dollar (USD).

Volatility continued throughout the month, primarily influenced by relative US strength driven by US Employment data, shifting US bond yields and messaging from the Fed’s September meeting. Additionally, the AUD was influenced by economic indicators from China such as a slump in Caixin China Services PMI.

Relative to the AUD, the USD led the pack in September, appreciating by 0.5%. Conversely, the GBP was the laggard of the month, depreciating in relative terms by 3.2% against the AUD. Year-on-year, the AUD remains behind the GBP and EUR by -8% and -6.8%, respectively, whilst ahead of the USD and JPY by 0.6% and 3.7%, respectively.

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