The past week saw positive momentum continue across global markets, with strong returns recorded by most major asset classes. This builds on the rebound seen in late April and early May, driven by stabilising interest rates and cooling inflation. However, stickier-than-expected inflation remains a key watchpoint in the outlook for rates and markets.

In Australia, the ASX 300 gained a healthy 1.8% over the week. Small caps slightly underperformed but still delivered a 1.5% return. The real estate sector was particularly strong, with A-REITs up 2.3%. Q1 retail sales data showed volumes declining 0.4%, confirming the subdued consumer environment.

Overseas, developed markets saw robust performance, with the MSCI World ex-Australia index rising 1.9% in both AUD and hedged terms. Emerging markets, while slightly lagging, still posted a 1.1% increase in AUD terms. In the US, optimism grew that the Fed might cut rates later this year. The S&P 500 gained 1% on Monday, while the Dow rose 0.5% and the Nasdaq surged 1.2%.

Bond markets saw yields push higher towards the end of the week, reflecting tempered hawkish expectations due to weaker-than-expected economic data. Australian 10-year yields fell initially but have since risen, while US 10-year Treasury yields settled at 4.448%.

The Reserve Bank of Australia's (RBA) Statement on Monetary Policy (SoMP) and rate decision were key focuses domestically. While rates were held steady as expected, the RBA noted that inflation is taking longer to ease than anticipated. This discussion of potential rate rises, though unlikely, put markers on notice.

In China, April trade data exceeded expectations with imports jumping 8.4% y/y and exports rising 1.5%. However, an unexpected decline in aggregate financing and the threat of US tariffs on Chinese EVs capped enthusiasm somewhat.

For diversified portfolios, this week's broad-based gains across both equities and real assets are encouraging. While pockets of economic resilience remain, especially in the US, the moderation in the pace of rate hikes globally amid cooling inflation is supporting risk sentiment. 

However, the persistence of inflationary pressures remains a crucial factor to monitor and we will get another important US CPI number in the US this week. Economist Andrew Hunt's Demand Pressure Index, an aggregate gauge of inflationary pressures, has fallen quickly to neutral levels, indicating weakening demand, particularly in services sectors like health and retail. It will be very interesting to see whether is already seeping into the inflation data (the markets would probably love that) or whether we need to wait a while longer. This aligns with the notion of a "knife-edge equilibrium" that could tip toward either inflation or deflation, adding further uncertainty. Whether its this week or next month, Andrew thinks the US is tipping from an inflationary to a disinflationary bias again.

Looking ahead, the Australian earnings season will be a key focus, with early results showing mixed but generally stable outcomes.