CFS Market Update: March 2024

• Major central banks left interest rates on hold but some flagged higher-than-expected inflation readings in early 2024, which broke the trend of falling inflation in the second half of last year
  
• The RBA left rates on hold at 4.35%
  
• The US Federal Reserve (Fed) chairman Jerome Powell said the US remained on the “sometimes bumpy road” to its 2% inflation target, fuelling a surge in positive stock market activity
• US, European, Japanese and Australian share market indexes rose to record highs during March on the back of solid economic data and an expectation of rate cuts later in the year.

The RBA left the interest rate at 4.35% after meeting on 18-19 March, noting the encouraging signs that inflation is moderating in Australia were being tempered by an uncertain global economic outlook. Headline inflation held steady at 3.4% for a third consecutive month in February, with the central bank working towards inflation returning to the target range of 2–3% in 2025, and to 2.5% or below in 2026.

The RBA’s next board meeting is not until May, so policymakers will have a more complete picture of quarterly inflation data – due on April 24 – before its next decision.

The Fed also left rates on hold at its March meeting. This led some experts to question the previous expectation of three rate cuts this year given more recent inflation trends and strong employment data. The higher-than-expected inflation readings in January and February suggested that progress in bringing price growth back to their 2% target had stalled.

However, Fed chairman Jerome Powell remarked that the recent uptick in inflation “hasn’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2%.” The European Central Bank and The Bank of England also kept rates on hold in March.

Global markets were generally boosted by the widely held view that major central banks are heading towards interest rate cuts this year and encouraging economic data with US, European, Japanese and Australian share market indexes all posting record highs over the month.

The Australian share market closed above 7,800 for the first time in its history on Friday 8 March, while the S&P 500, which tracks the performance of 500 of the largest US companies, reached its highest level on Wednesday 27 March. Europe’s benchmark Stoxx 600 also hit an all-time high in the month, as did Japan’s Nikkei. 

The RBA released its bi-annual Financial Stability Review in March, which contained plenty of reasons for optimism. Broadly, it noted an improved global outlook with positive implications for Australians.

“Although pressures from high inflation and tight monetary policy continue to weigh on many households and businesses, a number of developments – including the resolution of supply chain disruptions, declines in energy prices, continued strength in labour markets, strong household balance sheets and solid corporate earnings – have contributed to the global economy’s resilience to date,” the report noted.

While many Australian households and businesses continue to face challenges, most continue to service their debt and meet expenses on schedule. The Financial Stability Review also found that most households have continued to manage the pressure that inflation and interest rates are placing on their finances and that these pressures are expected to ease a little as inflation moderates further.

In terms of how households are handling higher mortgage rates, the RBA estimates that only around 5% of households with a variable rate mortgage have mortgage and essential living expenses greater than income.

Risks to the outlook for the global economy have become more balanced as inflation has eased, but global financial stability risks remain elevated. The RBA’s Financial Stability Review found that the overall picture is one of resilience to date.

However, among the global risks, three stand out as having the potential to affect financial stability in Australia.

1. Weaknesses in the Chinese property sector could interact with longstanding vulnerabilities in parts of the financial system, potentially spilling over to the rest of the world (including Australia) through trade channels.
2.  Deteriorating conditions in global commercial real estate (CRE) markets due to high interest rates and ongoing weak demand puts pressure on borrowers. The Australian CRE markets could be affected by the withdrawal of foreign investment.
3.  Many market participants have priced in an easing in monetary policy, likely later this year, with inflation returning to central banks’ targets. This leaves markets vulnerable to an adverse shock, including from inflation proving more persistent than expected or a severe geopolitical event. 

If you’re wondering about whether you should make changes to your investments, we recommend connecting with your financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary. 

If you don’t have an adviser, you can find an adviser near you using our Find an Adviser service at cfs.findadviser.com.au. Call us with any general queries on 13 13 36, Monday to Friday, 8:30am to 6pm Sydney time (+612 8397 1100 from outside of Australia).