The RBA paused the consecutive run of interest rate rises in April, leaving the cash rate at 3.60%. However, they left a hawkish bias in the statement, paving the way for more tightening to bring the inflation rate back into the 2-3% target range. AU3Y and AU10Y government bond yields ended 6bps and 4bps higher, respectively, at 3.00% for the AU3Y and 3.34% for the AU10Y yields.
On the data front, the NAB Business Conditions survey showed ongoing strength with above-average conditions, and the March labour market data came in hotter than expected, with 53,000 new jobs added and the unemployment rate steady at 3.5%. Annualised inflation in Australia is still well-above target at 7.0%, but prices are beginning to moderate slightly. Headline inflation added 1.4% over the March quarter.
Short-term interest rate futures are starting to price in more pauses from the RBA in the near term. 90-day bank bill yields trade at 3.68% (implying a cash rate of 3.68% in 90 days), while the 180-day bank bills trade at 3.86%. Some investment banks are still predicting a peak cash rate of 4.10% later in the year, but market expectations are beginning to pull back.
In the credit markets, the focus has shifted from the US regional banking crisis to the US corporate earnings for Q1. Results have been solid thus far, but most are emphasising caution and uncertainty in the months to come. Many are speculating that the regional banking crisis may not be completely resolved with First Republic Bank's issues heavily circulated in the finance media in recent days.
US Macro
US corporate earnings data is higher than the one-year averages, but many companies are revising outlooks lower for the remainder of the year. Stock price gains were also far lower for an earnings beat than in the previous four quarters, suggesting investor caution remains. The US debt ceiling woes continue to shake the market's confidence, with the CDS market trading to levels not seen since the GFC.
US Growth
GDP in the US came in at 1.1% for Q1, which was far below the consensus of 2.0%, but this was not due to a decrease in consumer spending. PCE growth was 3.7% in Q1, up from 1.0% in Q4. Goods spending jumped 6.5%, and Services spending increased 2.3%. Annualised inflation ticked slightly lower to 5.0% and a 0.1% monthly increase. The March Core PCE ticked higher by 0.3%, which is the Fed's preferred inflation measure and is likely to keep the interest rate rises in the US coming in months to come. Personal savings rates in the US as a percentage of disposable income increased slightly to 5.1% in March from 4.8% in February, showing some concerns among consumers about an upcoming recession.
US Equity Markets
Large-cap stocks outperformed small-caps on a total return basis in April, with the Dow Jones posting a 2.6% rise for the month, while the Russell 2000 fell 1.8%. The Nasdaq 100 gained modestly 0.5%, and the S&P500 lifted 1.6%. At the sector level, Energy, Consumer Staples, and Communications were the month's top performing, rising 3.6%, 3.3% and 3.8%, respectively. Consumer discretionary, Basic materials and Industrials were the worst-performing sectors in April.
M2 Money Supply and Gold
Gold is trading at all-time highs, while the M2 money supply is contracting for the first time after surging higher during the COVID pandemic. Government spending continues on an upward trajectory, corporate debt is rolling over on much higher interest rates, and homeowners with variable interest rates are seeing their repayments climb, all while banks are shoring up lending standards. These factors should encourage higher demand for US Dollars, which would typically be printed, but for the first time in history, we are seeing the money supply contract. The shortage could lead to an increase in defaults and potentially a recession, but with the current situation where the Fed is unlikely to ease policy in the near term, which is causing investors to pile into precious metals and commodities.
The Months Ahead
The month of May begins with a US Fed meeting on the 3rd, where they are expected to raise interest rates by 25bps, bringing the cash rate to 5.25%. Other important economic data to watch are the CPI print in the middle of May, The Non-farm Payrolls and the GDP numbers to finish the month. The regional banking issues in the US will be closely watched as the FDIC tries to broker a deal for the First Republic Bank, and US corporate earnings will be another focal point in the weeks to come.