Summary
Global economic activity in 2024 has been stronger than expected. Inflation data out of the US continues to be robust, buying the Fed more time to keep rates unchanged and let the restrictive policy do its work in time.
Market update
Equities: There was an increase in global risk aversion in April, as both the equity and fixed income markets generally sold off amid still hot US inflation and continued expectations that the central banks are unlikely to cut rates sooner than later. Against this backdrop, both the US and European equities fell by 4.1% and 1.7% respectively. Meanwhile Asia Pacific ex-Japan (“APAC”) markets returned 0.4% while China stood out, rising 6.6% amid a new set of policy easing measures discussed in the Politburo meeting. ASEAN markets underperformed both the broader Asian region and Emerging Markets during the month.
Fixed Income: In April, the yields on 2-year, 5-year and 10-year US Treasury notes soared by 42 bps, 50 bps and 48 bps to 5.04%, 4.72% and 4.68% respectively. Likewise, yields on Singapore government bonds climbed 14 bps, 36 bps and 34 bps to 3.50%, 3.40% and 3.45% respectively. Both government and credit bonds generally underperformed during the month amid the rising yield backdrop, reflecting the markets’ scaled back expectations of the Fed’s rate cut trajectory in 2024. Global bonds fell by 2.5%. Singapore bonds (7-10Y) posted -3.4%. The US high yield market returned -1.0%, outperforming its more interest rate sensitive US investment grade counterpart (-2.3%). The Asian USD bond market returned -1.2%.
Macro overview
Growth: The J.P. Morgan Global Manufacturing Purchasing Managers Index expanded for the third consecutive month in April with a reading of 50.3, suggesting that global manufacturing output growth continues to stabilise. Despite overall tighter monetary conditions across most advanced economies, global economic activity in 2024 has been stronger than expected, supported primarily by still resilient US growth. Looking ahead, US consumer spending, a key driver of US growth, will eventually slow on the back of dwindling excess pandemic savings, decelerating wage growth, and tighter lending standards.
Inflation: US Consumer Price Index (CPI) readings were generally robust in the first quarter of 2024. US core CPI, which excludes food and energy, experienced three consecutive monthly gains during the quarter. The strong core CPI reading can be partially attributed to higher rents, which accounts for roughly a third of the overall CPI basket. That said, we still believe that overall disinflationary trends will outweigh the recent “hot” inflation data. And as the US labour market cools further, wage growth, a key driver of inflation in our view, is expected to decelerate.
Monetary Policy: At the May FOMC meeting, the Fed Funds target rate was left unchanged at 5.25% to 5.5%, for the sixth consecutive time. Based on Chairman Powell’s comments, interest rates are likely to stay higher for longer to “let restrictive policy do its work”. Still, the emphasis remains on the timing of the first rate cut than the possibility of rate hikes. We believe that the strong reflation in the first quarter likely buys the Fed more time. Going forward, the Fed will likely rely on data to navigate the path towards lower rates.
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