Australian equities were mixed over the last week, with the S&P/ASX 300 Index gaining 0.2%. Gains were led by consumer discretionary and information technology stocks, up 2% and 3.1% respectively. The materials sector underperformed, falling 2% globally as Chinese demand for steel appeared to wane. BHP Group and Rio Tinto along with Fortescue Metals Group were the keys detractors to the index while nickel and lithium producers were also down sharply on further concerns over a potential battery glut. Key positive contributors to the index included CSL, Westpac Banking Corp and ANZ Group Holdings.

Global markets rallied, with the MSCI World Ex Australia Index jumping 2.4% in Australian dollar terms. The US S&P 500 gained 1.8% to hit new highs, buoyed by gains in mega-cap technology stocks such as Nvidia, Microsoft and Amazon. Asian indices were also stronger, except for China which fell 1.3%. Major European indices declined slightly. The best performing market globally was Japan which continues to march to its own tune and hit new highs with another 4% gain this week leaving it up 8% so far in 2024.

The big news this week though was the latest US inflation print which came out on Thursday.  After a substantial pullback over the past six months, inflation edged back up in December and, importantly, by more than expected. Consumer prices rose 3.4% from a year earlier and core inflation was 3.9% higher. Key drivers of the uptick included rental costs and services inflation, especially transport costs. The month-on-month numbers were potentially more worrying with the so-called Super Core measure (which excludes laggy official housing data) up strongly for the 2nd month in a row and up 4% on an annualised basis for the last 6 months.

Perhaps the biggest surprise of the week though was the markets sanguine reaction. After a brief wobble, markets shrugged off the news and bond yields actually fell a little. You could interpret this reaction in 2 ways. With price pressures broadly moderating, market expectations have been growing that the Fed may start cutting interest rates in coming months to support growth, somewhat conspiratorially, in a US election year. Or maybe the market is assuming that this is yesterday’s news and is seeing harder economic times ahead with the associated disinflationary pressures.  For now at least a stagflationary (higher inflation/low growth) scenario does not seem to be top of the market mind.

Interest rate sensitive local real estate trusts climbed 1.9% over the week, contrasting with defensive listed infrastructure which dropped 1.2%. Domestic bond yields were marginally down, with the Composite Index gaining 0.2%. The Australian dollar declined against major currencies other than the Yen.