May financial outlook - A guarded optimism

One thing is for sure: the global and domestic financial environment is never boring. Labour have swept back to power and now has a clear mandate to improve our standard of living and inject reform that helps Australian businesses grow and continue to stimulate productivity.

The US is bouncing around like a balloon in a swirling wind. Its core inflation is at its lowest since March 2021, sitting at 2.8% annualised. While it is above the target of 2%, all the signals suggest it is heading in the right direction, which may lead to an interest rate cut. This is a watch and act situation, as the effect of the Trump Administration’s import tariffs will influence inflationary pressures.

The ongoing saga over tariffs is hurting consumer and business sentiment, creating an uneasiness around spending at the consumer and capitalist levels. This is confirmed as US consumer confidence deteriorated in April to 50.8, down from 57 in March and worse than the market expectation of 54.5.

US home sales dived in March and are down 2.4% from last year’s period, while unsold houses rose by 8.1%. High interest rates are a significant factor. The labour market is steady, although job openings dropped in March, this was offset by the decline in redundancies and layoffs.

Britain is on the up and returned to growth in February. Its GDP grew at a monthly pace of .5% ahead of economists’ expectations of .1%. In China, retail sales rose 4% in January/February compared to last year’s period, and industrial production bounced 5.9% relative to January/February 2024.

The US tariff story continues to create global uncertainty, and escalating geopolitical tensions don’t help. Equity markets have responded positively to the temporary pause in trade tensions, but there is still a risk to global growth and stability in international markets. Modest inflation, although higher than past averages, should support credit and equity markets in the short term.

US central banks and the US Federal Reserve are in a balancing act of supporting the economy and not fueling inflation. Liquidity from the US and China’s central banks will be required to keep markets stable. Liquidity data is positive for growth investments such as equities and precious metals, but risk is still a factor.

While we expect continued volatility in global markets, we are guardedly optimistic about medium-term growth. We will shift our portfolios to a more defensive position if economic signals weaken or central banks withhold support.

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