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JBWere’s CIO View: Markets and Macro

Sally Auld, Chief Investment Officer | JBWere

The very supportive backdrop for both fixed income and equity markets in Q124 is starting to unravel. In large part, this has been driven by a run of three consecutive stronger-than-expected US inflation data releases. This week, the Fed Chair validated the market’s expectation that the easing cycle will no longer likely begin mid-year. Markets are thus currently digesting the impact of a higher-for-longer rates backdrop. In this week’s publication, we run through recent developments and think about what might lie in store in 2025. While our modal forecast is unchanged, the distribution of risks either side of this forecast now reflects a greater range of outcomes (that is, more uncertainty).

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Important Notice: This content has been published on the website on 19 April 2024 and reflects our view at the time of publishing, however views and commentary may change after this date. This document has been authorised for distribution in Australia and New Zealand only. It may not be reproduced, adapted, transmitted, distributed or reproduced in any form by any process without the written consent of JBWere Limited. For more information, visit jbwere.com.au or contact a JBWere adviser today.

Advice contained in this article comprises general financial advice only and has been prepared without considering your objectives, financial situations or needs. Before acting on any advice contained in this article, you should consider whether the advice is appropriate for your circumstances.

Key Points:

The past couple of weeks have seen US equity markets retrace (DJIA -5%, S&P500 and Nasdaq -4%, local currency terms) as the supportive foundations that drove a friendly first quarter for both growth and defensive asset classes become more challenging. In the wake of a run of stronger-than-expected US inflation numbers, markets are now having to digest the prospect of a higher for longer rates environment.
Bond yields are rising as the market both pushes back and pares expectations around the coming easing cycle in the US, the USD is rallying vs. G10 peers and there has been a broad and significant rise in commodity prices and inflation breakevens. Forecasters have been revising both global growth and developed market inflation forecasts higher. And at the same time, geo-political risks appear to be escalating.
By any measure, this is not an easy environment to navigate. Perhaps most importantly, it raises the prospect of a wide range of possible outcomes into 2025. Our modal forecast (central case scenario) remains one in which the lags associated with significant monetary tightening eventually pressure the private sector, such that margins compress, labour markets loosen, economic growth slows and inflation returns to target. Hence our conviction around more defensive portfolio positioning, at both an asset class and whole of portfolio level.
But recent developments have also increased uncertainty around other possible outcomes, in our view. These range from a world in which the US neutral rate is considerably higher thanks to sustained positive supply side developments, to one in which the Fed needs to resume the tightening cycle in order to force the last leg of disinflation via recession. Such outcomes clearly have quite distinct implications for asset allocation and portfolio construction.

For more information contact a JBWere adviser today.