Research Insights | Market Commentary June 2023
In June investment markets brushed off the potential for further interest rate hikes as economies appear to be weathering the higher inflation and higher cash rate regime much better than central bankers had anticipated.
The US Federal Reserve kept rates on hold in June as inflation for the year to the end of May printed 4.0%, down 0.9% for the year ending the prior month. Despite the US FED Funds rate increasing strongly over last 12 months economic growth remains resilient with US GDP growing at an annualized rate of 2.0% to the end of March 2023, revised up from a rate of 1.3%.
The Bank of England raised the UK cash rate by 0.5% to 5.0% as core inflation for the year to May came in at 7.1% (up from 6.8% in April). The European Central Bank delivered a 0.25% rate hike in June which sees the European cash rate lift to 3.5%.
The RBA met on 6th June and elected to increase the cash rate by 0.25% to 4.10%. Australian unemployment fell in May to 3.6% with jobs gained well ahead of expectations. Persistently strong employment data coupled with strong retail sales in May (with discretionary spending and dining out strong) will concern the RBA as the rate hikes over the last 12 months are not having their desired impact yet. The Australian Bureau of Statistics’ May monthly inflation indicator came in at an annualised rate of 5.6% which was a decline from April’s print of 6.8%.
US equities were up strongly in the month (S&P500 +6.5%) which was driven by a handful of mega-cap stocks. The Australian share market increased over the month (+1.9%) led by Materials and Information Technology stocks whereas the Healthcare sector was one of the few negative sectors. Currency-hedged international equities were up 5.6%, assisted by the aforementioned gains in US equities, and unhedged international equities gained 3.1%, blunted by the Australian dollar which increased (+2.5%) against the US dollar, buying US$0.6664 at the end of the month.
The Australian 10-year government bond yield rose by 42bps to 4.02% and the 2-year government bond yield rose by 67bps to 4.22%. The US 10-year government bond yield rose by 19bps to close at 3.84% and the US 2-year government bond yield rose by 49bps to 4.90.
Key Developments Post Month-End
The RBA met on 4th July and elected to retain the current cash rate at 4.10% noting that “interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook".
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