The Fed’s preferred measure of inflation — the Core Personal Consumption Expenditure (PCE) index came in at +0.3% month-on-month for February versus +0.4% expected and +0.6% in January. A +0.3% monthly rate annualised is just a touch below 4%, which is probably not low enough for the Fed to feel comfortable in pausing rates. However, it indicates inflation is moving in the right direction. As of March 23, the market was implying a peak in rates of 4.9% in May 2023, with rates at 4.1% by the end of 2023. This is down from a March 8 reading of a 5.7% peak in September and 5.5% at year-end.

 

Australian retail sales rose by a small 0.2% in February and are down by 1.5% on a three-month average, a clear sign that consumers are pulling back on spending. The February monthly consumer price index was lower than expected, tracking at 6.8% year on year after peaking at 8.4% per annum in December and looks to be declining slightly faster than the RBA was forecasting. However, the current pace of inflation is still clearly way too high, but inflation will slow further over 2023 because commodity prices have fallen, Covid-related supply chain constraints have eased and inflation is a lagging indicator of economic activity so will slow further as economic momentum has weakened and as consumers cut back spending.

 

The outlook for equities in the near-term is constrained because there could be more strains in the banking system, global inflation has been surprising to the upside in the US and Europe which may keep central banks more hawkish than expected and the geopolitical environment remains very tense with news this week that Russia is planning to station tactical nuclear weapons in Belarus.

 

Bonds are likely to provide returns a bit above running yields, as inflation slows and central banks become less hawkish.

 

Unlisted commercial property and infrastructure are expected to see slower returns, reflecting the lagged impact of weaker share markets and last year’s rise in bond yields (on valuations). Commercial property returns are likely to be negative.

 

Australian home prices are likely to fall another 8% or so as rate hikes continue to impact, resulting in a top to bottom fall of 15-20%, but with prices expected to bottom around the September quarter, ahead of gains late in the year as the RBA moves toward rate cuts.

 

Cash and bank deposits are expected to provide returns of around 3.25%, reflecting the back up in interest rates.

 

 

Source: AMP Capital, Pendal Group, AZ Sestante