Australia’s current economic landscape presents a dynamic and evolving picture. With notable shifts in key economic indicators such as inflation, retail spending, and unemployment rates, understanding these trends is essential for navigating the financial terrain.

This past month, a nuanced picture emerged from the Australian market, influenced by local and global events. Changes in key indicators such as inflation, retail spending, and employment rates provided insight into Australia’s current financial health and consumer behaviour.

The performance of Australian equities reflected both challenges and opportunities within the market, and global economic trends and fixed income stability also continued to shape the outlook.

Here is our comprehensive overview to equip you with the knowledge needed to navigate the evolving economic environment confidently:

Rising CPI and decreasing spending

May saw a greater than anticipated increase in the Consumer Price Index (CPI), rising to 4.0% from 3.6% in April[i]. While inflation has remained relatively stable over the past five months, this marks the third consecutive monthly increase. The primary contributors to this rise were housing, food and beverages, alcohol and tobacco, and transport sectors.

This persistent inflationary pressure has led some economists to predict that we might have to wait until next year for the first official interest rate cuts. The Reserve Bank of Australia (RBA) remains vigilant, keeping a close eye on these trends as they determine the appropriate monetary policy adjustments.

Retail spending continues to be a critical indicator of consumer confidence and economic health. In April, retail turnover increased by a modest 0.1%, which was insufficient to offset the 0.4% drop in March[ii]. This ongoing weakness in retail spending highlights the cautious approach of consumers amidst economic uncertainty. Another significant economic indicator is the unemployment rate, which dropped slightly from 4.1% in April to 4.0% in May[iii]. This highlights potential challenges in the labour market, adding another layer of complexity to the economic outlook.

Australian equities

Despite the inflationary pressures, the Australian equities market showed a mixed yet overall positive performance in May, with the ASX 200 Index recording a modest gain of 0.9%. Sector-wise, Information Technology (I.T.) led all sectors with an impressive 5.4% return, followed by Utilities (+3.4%), Financials ex-Property (+2.6%), and Property (+1.9%). On the other hand, Communications (-2.6%), Consumer Staples (-1.0%), Energy (-0.7%), and Consumer Discretionary (-0.6%) experienced downturns[iv].

The strong performance of the I.T. sector is particularly notable, mirroring the surge in the U.S. Nasdaq Index. Investors continue to show confidence in tech stocks, driven by innovations and robust earnings reports. Conversely, the rise in CPI has tempered market sentiment, impacting sectors like Communications and Consumer Staples.

Global landscape

Global market movements also play a crucial role in shaping investor sentiment and economic trajectories. In the United States, the Federal Reserve maintained its federal funds target rate at 5.25-5.5%, citing softer inflation and a cooling job market as reasons for holding steady[v].

European markets saw mixed results, with the FTSE 100 Index and DAX 30 Index gaining 2.08% and 3.16%, respectively[vi]. These gains were buoyed by easing UK inflation and higher-than-expected inflation in other regions. Meanwhile, emerging markets underperformed developed markets, highlighting the divergence in economic recovery trajectories worldwide[vii].

Fixed income

In its May meeting, the RBA decided to leave the cash rate target unchanged at 4.35%, indicating a cautious approach towards monetary policy adjustments[viii]. The board expects that it will take some time before inflation is sustainably low, with projections showing a gradual return to target levels over the coming years[ix].

Australian bond yields remained relatively stable throughout May, with minor fluctuations. The Bloomberg AusBond Composite 0+ Yr Index returned 0.39% from month-end to month-end, reflecting a stable fixed income environment despite broader market volatility[x].

If you would like more information on the Australian or Global economic markets, or if you want to discuss the impact on your portfolio, contact our office today.

DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.

[i] ABS (2024) Monthly Consumer Price Index Indicator

[ii] ABS (2024) Retail Trade, Australia

[iii] ABS (2024) Labour Force, Australia

[iv] J.P.Morgan (2024) Monthly Market Review – May 2024

[v] Federal Reserve (2024) Press release May 2024

[vi] Financial Times (2024) Markets Data

[vii] MSCI (2024) MSCI Emerging Markets Index performance

[viii] RBA (2024) Monetary Policy Decision June 2024

[ix] RBA (2024) Statement on Monetary Policy May 2024

[x] Bloomberg (2024) Bloomberg AusBond Composite 0+ Yr Index