Despite some volatile swings, the first week of May ended up being a reasonably positive one for markets. Emerging markets and global small caps rallied a few percent, helped ironically by weaker economic data out of the U.S. A dovish statement from Fed Chair Jay Powell mid-week initially boosted markets, but earnings disappointments from companies like Starbucks, pointing to economic weakness, erased the gains. However, a weaker than expected U.S. jobs report on Friday was taken positively, as signs of a softening labor market and dissipating inflationary pressures raised hopes of a Fed rate cut. U.S. 10-year Treasury yields pulled back from recent highs on the news.

Looking back at April, U.S. markets were volatile, with the Nasdaq and S&P 500 down as much as 6% and 4% respectively at one point on worries about stubbornly high inflation and interest rates. However, they pared losses to end the month down around 2%. Australia (-3%) also saw some weakness on lingering inflation concerns. The standouts were emerging markets and the UK, both up nearly 4% in April. China rallied strongly late in the month as authorities got a handle on the property market and amid shifting U.S.-China trade sentiment.

Year-to-date, Japan (+15%) and Europe (+10%) remain the top performing regions. The Nasdaq and S&P 500 have moderated gains to around +6%. Emerging markets have climbed to +5-6% with the recent rally. The trend in interest rates has been upwards, with U.S. 10-year yields rising from 4% to 4.6% before easing slightly last week.

For Australian diversified growth investors, actively managed funds, positioned more defensively than passive funds, lagged in Q1 but have caught up in the past month. Year-to-date returns are around +3%, held back by a steady Australian dollar.

In focus recently are inflation worries and the mortgage situation in Australia. U.S. inflation expectations ticked down last week while remaining steady at 3% in Australia. The implied probability of RBA rates dropping this year has decreased and soem economists are even forecasting more hikes. However, easing is still forecast next year  as the global economy weakens. Average mortgage rates plateauing around 6% are expected to remain rangebound. The RBA believes the pass through effect on mortgages has actually been lessened as fixed rate loans taken out during COVID progressively switch to variable rates through 2024.

Despite some high-profile misses, the U.S. earnings season has been solid so far, with 80% of companies exceeding expectations. Overall earnings growth is tracking around 5% year-on-year in nominal terms, though real growth is more muted.

In summary, markets have proven resilient despite cross-currents and some volatility. Growth has moderated but not fallen off a cliff. Inflation and interest rate concerns are balanced against hopes for Fed easing.