Weekly Market Update

ASX closes higher as cooling US inflation fuels anticipation of rate cuts

May 21, 2024

The Australian share market had a choppy but overall positive week, with the S&P/ASX 200 index gaining 0.84% to close at 7,814. The week started off flat as the market searched for direction amid drags from the energy sector. However, sentiment improved later in the week, buoyed by slowing wage growth in Australia and easing US inflation, which put investors in a buying mood as they anticipated future interest rate cuts. 

Nearly all sectors ended the week higher, led by strong gains in interest rate sensitive areas like REITs (+3.9%) and tech (+3.1%). The major miners also performed well on expectations of further stimulus measures in China. However, the energy sector lagged as oil and uranium producers came under pressure.

In company news, Aristocrat Leisure was a standout, surging over 12% after reporting strong profit growth and raising its dividend. Bendigo and Adelaide Bank also impressed with a positive trading update featuring expanding margins and low impairments. On the negative side, Fletcher Building and Lendlease came under selling pressure - Fletcher after downgrading earnings guidance on housing market headwinds, and Lendlease on news it owes over $100mn to the ATO. 

Data wise, the April jobs report revealed an uptick in Australia's unemployment rate to 4.1% despite solid employment growth, likely giving the RBA more scope to hold off on further rate hikes. Meanwhile in the US, April CPI came in as expected which relieved fears of an upside surprise and kept alive hopes for Fed rate cuts later this year. 

A key focus domestically was the federal budget announced on Tuesday. The "cost of living" budget included relief measures such as energy bill subsidies and a $300 payment to households. While these should provide some support to consumer spending, there are concerns it could also add to inflation pressures by stimulating demand at a time when the RBA is trying to cool the economy. The budget also included billions in spending initiatives and tax breaks for tech and critical minerals industries under the government's "Made in Australia" program. With fiscal policy looking more expansionary at a time of still elevated inflation, it creates a complicated backdrop for monetary policy and could lead the RBA to hike rates further than previously expected. Much will depend on how quickly inflation responds to the recent tightening and if strong demand and a tight labour market keep it stubbornly high.

Globally, Chinese economic data presented a mixed picture with industrial output rising but retail sales and property investment slowing substantially, increasing focus on the need for additional stimulus measures from policymakers. Major US indices pushed further into record territory though as corporate earnings remain resilient, inflation cools, and AI-related stocks maintain their relentless surge.

Overall, it was an eventful week characterised by crosscurrents. The prospect of peaking interest rates supported equities, but high valuations and pockets of speculative excess sparked some concerns that markets may be getting ahead of themselves. Investors seem to be pricing in an optimistic scenario of easing inflation, a soft economic landing and potential rate cuts, leaving room for volatility if data disappoints or central banks prove more hawkish than anticipated. As such, market participants will be closely attuned to rhetoric from Fed officials and incoming data releases to gauge if the current "goldilocks" environment for stocks can persist. While momentum favours further gains for now, some caution is warranted given the historic rally year-to-date and an economic cycle that is undoubtedly maturing. The stimulatory Australian budget further complicates the picture by working somewhat against the RBA's goals, creating uncertainty around the interest rate path ahead.

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