Rate hikes are back in view as Australian monthly inflation topped estimates. Inflation accelerated to its highest rate in six months in May, as annual headline CPI jumped to 4.0% from 3.6% in April, while trimmed mean inflation also accelerated to 4.4% from 4.1%. While the monthly CPI series is volatile, the figures reinforce the persistence of Australia’s inflation problem with headline inflation running at its fastest rate since November 2023.

The global monetary policy easing cycle is gradually kicking into gear with the Swiss central bank kicking off the global rate cut cycle with a rate cut in March, followed by the Swedish central bank in May. So far in June the Bank of Canada and the European Central Bank (ECB) have both added impetus to the global easing cycle by each cutting their policy rate by 25 basis points this month.

The past week has delivered disappointing economic news from the perspective of lower than expected consumer spending (monthly retail sales) and higher than expected inflation (monthly CPI). This mix places the Reserve Bank of Australia (RBA) in a difficult spot with an extended period of on hold policy looking increasingly likely.

Emerging market (EM) equities have been delivering improved relative performance in the last few months after disappointing through much of 2022 and 2023. EM valuations remain attractive versus Developed Market (DM) equities and the EM earnings growth outlook continues to look appealing.

US Core CPI for April eased moderately on both a month on month (+0.3% from +0.4) and year on year basis (+3.6% from +3.8%). This was in line with consensus expectations but still prompted a sharp decline in bonds yields, a fall in the US dollar and a greater than 1% bounce in the S&P500 to a fresh record high.

For the second year in a row, last night Treasurer Jim Chalmers announced that the Federal Government is on track to deliver a budget surplus. The FY24 budget now forecasts the budget balance in 2023/24 will be a surplus of +$9.3 billion.

While the US equity market has been buffeted recently by shifting expectations for inflation and interest rates, corporate earnings continue to be a positive support. While positive earnings surprises are expected during US reporting seasons, we believe a stronger signal is coming from revisions to forward estimates with S&P500 forward earnings estimates having been moderately upgraded during reporting season.

Higher than expected inflation has dampened market hopes for lower Reserve Bank (RBA) policy rates later this year. We have shifted our base case expectation for policy easing from late 2024 to first quarter of 2025, albeit we still see some chance of a late 2024 cut if a clearer disinflation trend re-emerges over the next couple of quarters.