Global markets
Financial markets followed a similar pattern over the week, with both equity and bond markets weaker on the back of rising bond yields, the likelihood of higher cash rates, and the renewed and expanding hostilities in the Middle East. Domestically, only the utilities and energy sectors delivered positive returns, while bond yields were higher across all parts of the curve.
US inflation and bond markets
The week ended with US inflation data showing no signs of abating — core CPI at 2.4% year-on-year, headline CPI at 3.4%, and headline PPI at 5.4%. While the data was in line with market estimates and has remained steady over the last few prints, bond markets remain on a negative trajectory given the lack of any material improvement in the inflation outlook, alongside a growing US deficit that now requires funding of around US$1.4bn annually.
Combined with an oil price that rose 10% over the week — Brent ended at US$107 per barrel — near-term downside risks to markets remain.
The Fed decision ahead
This week sees the US Federal Reserve meeting, with markets now anticipating a 70% chance the Fed will hike the Fed Funds Rate by 0.25% to 4.0%. While we do expect the Fed to hike, we still view this meeting as line ball given inflation has remained steady, albeit above the Fed's target. The US economy remains on a solid footing, with PMI data showing ongoing expansion, corporate earnings remaining strong, and a stable labour market.
Markets, however, are clearly requiring the Fed to move. We believe no change in the policy rate would have the greater negative impact, while a rate rise could bring increased stability across bond markets by signalling the Fed is prepared to address the ongoing inflation risks.
The Australian outlook
In Australia, the sharp fall in both consumer confidence (−5.2 points) and business confidence (−8 points) continues to point to a weakening economic outlook. Ongoing declines in house prices, together with the likelihood of one or more further rate rises by the RBA when it meets this month, will only add to the slowing growth outlook.