April saw a surge in Chinese COVID-19 cases. Governments have implemented lockdowns, impacting around 375 million people across 45 cities since the beginning of this outbreak. Markets expect further downward pressure on Chinese economic growth, supply chain disruption and inflation.

Investors continued to grapple with the continuing Russia/Ukraine conflict, rising global bond yields and an underwhelming US reporting season that included some disappointing results and significant share price falls from certain large companies. Collectively, the FAANG stocks (Meta aka Facebook, Apple, Amazon, Netflix, and Alphabet aka Google) declined by more than -10% during April.

Australian large caps fell -0.8% for the month with Materials and Information Technology weighing on the market’s returns. International Equities (hedged) fell -7.4% during the month while a falling Australian dollar (down 5.8% against the US$ to US$0.7061), cushioned the blow for unhedged international equity investors, to a loss of -3.2%.

Australian inflation hit a 20-year high in the first quarter and is now running at an annual rate of 5.1% with petrol, new dwellings and food prices moving significantly higher. This influenced the RBA’s decision to approve the first interest rate increase in over a decade on 3rd May, further details below. US inflation is running at 8.5% over the year to the end of March, a 40-year high further supporting the US Federal Reserve’s decision to tighten monetary policy.

Bond markets reacted to the inflation prints with the Australian 10-year government bond yield increasing by 29bps to 3.13% and the 2-year government bond yield increasing by 65bps to 2.45%. US yields also rose, with the 10-year government bond yield gaining 59bps to close at 2.93% and the 2-year government bond yield increasing by 38bps to 2.71%.

News Flash – on 3 May the RBA raised interest rates for the first time since 2010, lifting the cash rate by 0.25% to 0.35%. Many of the major banks immediately announced that they would pass- through the full increase through to their variable loan rates. Cash markets expect further RBA tightening through to mid-2023, with significant uncertainty as to the peak cash rate (estimates range from 2.25% to “somewhere above 3%”). The RBA hopes to achieve a soft economic landing by slowing demand and economic growth, but without instigating a recession.

Article source: Australian Unity

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