CFS Market Update: May 2024

• RBA, the Fed look to slow inflation by keeping interest rates higher for longer.

• Both central banks noted that the economic outlook remains uncertain. 

• Australia’s Federal Budget on 14 May largely seen as neutral and did not affect markets.

• Treasurer tried to balance cost-of-living relief with the risk that more spending may fan inflation. 

The RBA left interest rates on hold at its 6/7 May meeting and while most observers think the next move in rates will be down, minutes from the last RBA meeting suggest it considered another hike. The central bank noted that “the path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.” However, the most likely scenario is that the RBA holds steady for most of 2024 ahead of rate cuts later in the year. 

Like Australia, the US is also trying to carefully manage its response to higher-than-expected inflation figures in both the March quarter and the month of April. The Fed has been helped by inflation softening while stagnant wages and jobs growth in Australia has eased the RBA’s concerns.

Treasurer Jim Chalmers handed down the Labor government's third Federal Budget on 14 May, with tax cuts and power bill assistance the headline announcements for Australian households. Broadly, the Budget reflected the government’s desire to walk a line between providing cost-of-living relief and keeping the purse strings tight on other measures to avoid fuelling inflation.

Australia's minimum wage and award wages will increase by 3.75 per cent from 1 July. The Fair Work Commission announcement will see the national minimum wage increase to $24.10 per hour and $915.91 per week, based on a full-time, 38-hour working week. This translates to an increase of about $33 a week, affecting some 2.6 million workers or just over 20% per cent of the national workforce. Overall, the Fair Work Commission (FWC) estimates the increase to minimum and award wages will affect "about a quarter of all Australian employees".

The FWC said the increase to the minimum and award wages would have a "limited" effect on the broader economy, noting employees who relied on modern award minimum wage rates were "significantly different" to the entire Australian workforce.

While Stage 3 tax cuts had been confirmed prior to the Federal Budget announcement, they will reduce the tax paid by all working Australians. Other Budget benefits included energy bill relief being extended to every Australian household, with $300 automatically credited to electricity bills next financial year in quarterly instalments, and increased rental assistance. For more on what the Federal Budget might mean for you, have a look at our Federal Budget wrap-up.

The RBA meets again on 17/18 June and while household spending, retail sales, wage growth and the broader state of the labour market will be closely monitored, there also remains a high level of uncertainty about the overseas outlook. While there has been improvement in the Chinese and US economies and many global commodity prices have picked up, geopolitical uncertainties, including those in the Middle East and Ukraine, remain significant.

CFS Chief Investment Officer, Jonathan Armitage, has just returned from the US and has some concerns over the state of the US consumer. While corporate earnings were a bright spot for US companies during May, income growth has slowed and about 60% of the population is having to reign back on discretionary spending. 

 
Combine volatile inflation data with it being an election year in the US and policymakers are facing some tough decisions. These types of events can impact business and consumer confidence, which can lead to more investors selling shares instead of buying them. This can create a market downturn that could stretch for days, weeks or even months.

If you’re wondering about whether you should make changes to your investments, we recommend connecting with your financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary. 

 If you don’t have an adviser, you can find an adviser near you using our Find an Adviser service at cfs.findadviser.com.au. Call us with any general queries on 13 13 36, Monday to Friday, 8:30am to 6pm Sydney time (+612 8397 1100 from outside of Australia).