Investors are closely monitoring central banks’ statements to anticipate potential interest rate reductions. Despite inflation dropping significantly from Covid-induced peaks, persistent pricing pressures are hindering the return of official inflation to target levels, creating uncertainty about whether and by how much borrowing costs will be reduced this year.

Ignoring these concerns, equity markets have reached new record highs in several regions. In Australia, the S&P/ASX 200 Index returned 3.3%, and most other major markets also saw strong gains. Fixed income also yielded positive returns, particularly in corporate bond markets, where prospective yields exceeding those available on comparable government bonds continued to attract investors. The rally extended to cryptocurrency markets, with Bitcoin surpassing the US$70,000 level for the first time, driven by record inflows.

In the US, headline inflation accelerated slightly in February, unsettling investors. Consequently, Federal Reserve Board members dampened expectations for imminent interest rate cuts, suggesting that sticky inflation and robust economic data warrant maintaining current policy settings. The manufacturing sector also showed strength, reinforcing the prudence of not easing policy settings while economic activity levels are robust. On the labour market front, an additional 275,000 new jobs were created in February, indicating that US firms remain confident in the outlook for activity levels and profitability.

In Australia, the Reserve Bank left interest rates unchanged at 4.35% and indicated that borrowing costs are unlikely to rise further in this cycle. Officials are confident that inflation will return to the 2% to 3% target range in 2025, but are understandably cautious about suggesting near-term borrowing cost reductions. At the end of the month, investors were still expecting two rate cuts this year.

New Zealand’s economy slipped into recession in the second half of 2023, with GDP falling 0.1% in Q4. Higher borrowing costs appear to be hindering activity levels, but officials are concerned about persistently high inflation and the risk of premature interest rate cuts.

In Europe, Switzerland became the first G10 country to lower interest rates in this cycle. However, inflationary forces remain strong in other parts of Europe, particularly Germany, where economic indicators continue to worsen.

In Asia, China’s economic outlook improved with export orders rising for the first time in a year. The Bank of Japan finally abolished its negative interest rate policy, lifting official borrowing costs above zero for the first time in eight years.

The AUD appreciated by 0.4% against the US dollar. Australian shares performed well in March, with the S&P/ASX 200 Index ending the month 2.6% higher.

Global property securities also rallied, with the FTSE EPRA/NAREIT Developed Index adding 3.6% in Australian dollar terms. Government bond yields moved lower, resulting in positive returns from global fixed income.

Credit spreads tightened further, resulting in another positive month for corporate bonds globally. Looking ahead, issuance volumes are expected to moderate from record levels in Q1.