March 2024 quarter economic and market commentary

Financial markets commenced the year expecting some 150 basis points (bps) worth of policy rate cuts from the Fed in 2024. Those expectations were dashed as inflation proved “stickier” than either the markets or the Fed had expected. By the end of the quarter financial markets were anticipating between two and three 25 bp policy rate reductions in the calendar year with those mainly focussed in the second half of the year.

That development saw a pronounced rise in US bond yields back toward cyclical highs last visited in October 2023. Rising yields proved a fillip for the USD which rallied against the EUR and even more significantly against the JPY over the quarter. The latter move caught markets a little by surprise as the Bank of Japan finally abandoned its negative interest rate policy in the quarter. The AUD also depreciated against the USD over the quarter.

US equity markets seemed unfazed by the rise in yields. Resilient economic activity and a growing sense of optimism of the earnings potential of companies at the epicentre of AI development led the surge in US equity markets which was mostly focussed on technology stocks.

Despite some positive signs from monthly consumer price index (CPI) indicator reads the RBA seemed reluctant to move from a soft tightening bias over the quarter. That probably reflected lingering concerns regarding domestic inflation pressures, particularly in the service sector where the monthly CPI indicator has limited coverage being mainly focussed on the goods sector.

As in the US, domestic financial markets began the year expecting policy rate cuts from the RBA in 2024, albeit of lesser magnitude and like the US wound those expectations back over the quarter.

Going forward, the key issues for 2024 revolve around the “stickiness” of inflation both locally and in the US. There is some conjecture that disinflation can be a disjointed process and that the “last mile” for central banks to the inflation target is particularly challenging.

Structural factors are important and undergoing some critical shifts. This includes higher “neutral” interest rates, emboldened regulators, growing protectionism, and emergent “mega forces” such as climate, cyber-security and AI.

Geo-political risks are elevated given forthcoming elections and the US Presidential election in particular. Tensions associated with Russia / Ukraine, China /Taiwan, the Middle-East and the Korean Peninsula are also present.

That all suggests that there will be episodic bouts of volatility where the potential for seismic shifts in sentiment and the prices of financial assets exist.