Equities have made a strong comeback in FY23, with global stocks on track to deliver ~20% returns in AU$ terms. Australian equities have delivered a more moderate but still strong ~15% total return for the financial year. In this quarterly report, we explore the factors behind this equity market comeback.

The Australian economy finds itself in an interesting position, characterised by a mixture of softening activity indicators and a remarkably tight labour market. This situation bears some resemblance to economic conditions in the US, except that Australia has not witnessed significant evidence of declining inflation pressures.

The Australian equity market is on track for a strong financial year return (14%) and remains in positive territory for the current calendar year. 

The US market has risen 10% this calendar year and is up 18% from its October 2022 lows, despite widespread investor bearishness around US market prospects. The US does remain more than 10% below late 2021 highs, allowing the bears to continue to label the rebound as just a bear market rally.

Both Australian and US consumer confidence surveys are wallowing at very depressed levels. However, both economies continue to register multi-decade lows in unemployment, and consumer spending has so far remained relatively resilient.

While inflation has proved sticky in recent months, our analysis suggests that we are on the cusp of a significant deceleration in US inflation. As we explore in this report, this should “all things equal” be supportive for risk assets.

As the US government's deadline to raise the debt ceiling approaches, the debate in Congress is intensifying. In order to meet its obligations, the government needs to agree on a bipartisan solution to increase the nation's debt limit, which controls how much money it can borrow.

Last night, Treasurer Jim Chalmers announced a dramatic improvement in the nation’s fiscal position. The FY23 budget is now forecast to register a surplus of $4.2 bn (0.2% of GDP). The improvement in the near-term budget position is due to an unexpected revenue boom underpinned by soaring commodity prices and a strong labour market driving higher company and personal tax receipts. In this special report, our Investment Strategy Group and Planning Team share their views on the 2023 Federal Budget.