April insights: Economic resilience and market dynamics

As we move into the latter part of 2024, its future path will be highly influential for the direction of the global economy. April concluded with the US economy continuing to demonstrate resilience, evidenced by growth in retail sales and reaffirmed by jobs data indicating the tightness of the labour market. Economic data outside of the US pointed to a broadening of growth across sectors and regions of the global economy that have struggled in the last 18 months, namely linked to the manufacturing cycle.

Global economic stability and anticipation of ‘no landing’

As the global economy enjoys stable growth, an increasing number of market participants are now expecting a “no landing” scenario, meaning they expect to see accelerating growth with sticky inflation and little risk of a recession.

Potential second wave of inflation

The ongoing economic growth rebound raises the likelihood of a second wave of inflation. This likely contributed to the three consecutive hotter-than-expected Consumer Price Index (CPI) readings in 2024 in the US. Shelter inflation and auto insurance remain stubbornly above target as these components of the inflation basket require more time to adjust, potentially prolonging the disinflationary path. More cyclically sensitive components of the US inflation basket also reaccelerated in the first months of the year, questioning the prospect for significant rate cuts from the US Federal Reserve (Fed) in 2024.

Disinflationary trend amid growth

Despite the higher-than-expected inflation reports, we expect the overall disinflationary trend to continue with some volatility before it gets to target. This may impact the timing of anticipated Fed rate cuts, which have been pushed out to the latter part of 2024.

Disappointing US GDP growth

Although a number of data points imply a positive growth outlook, US GDP results for Q1 2024 came in below expectations, with modest growth of 1.6%. It remains uncertain whether this, along with the inflationary surprise, indicates a stagflationary environment (where an economy experiences stagnant economic growth combined with high inflation), or simply short-term economic volatility.

Rising US yields and equities

We witnessed another rise in US bond yields in April, driven by persistent inflation amid higher growth. Equities, having performed strongly through the start of the year despite rising yields, struggled through April as the rise in bond yields coincided with a weaker than expected Q1 US GDP print.  

Performance divergence in equities

The performance of the “Magnificent 7”^[1] companies diverged after their earnings releases. Microsoft and Google exceeded expectations thanks to a surge in cloud computing revenues, boosted by their use of AI services. However, Meta’s comments regarding its AI-related capex spend and potential monetisation disappointed the market. Tesla’s revenues were severely impacted in the first quarter, experiencing a 9% year-on-year decline. This points to a more discerning market with regards to company prospects and their fundamentals which we see as a better environment for investing than a frothy, speculative market, as seen for example in 2021.

Commodities surge amid uncertainty

The backdrop of geopolitical uncertainty, higher growth, and higher inflation led to significant gains for commodities in April.  We observed a surge in oil prices after the initial Israel attack on Hamas. While this has since moderated, the risk of further escalation remains a significant factor. Copper continued its upward trend, driven by robust demand as the manufacturing cycle showed evidence of rebounding.

Japanese currency weakness

On the currency front, the Japanese Yen extended losses throughout April, reaching a 34-year low after the Bank of Japan kept interest rates on hold and failed to provide assurance related to currency intervention.

Reflections on April’s global economic landscape

In conclusion, reported data through April presented a mixed view of the global economy. While the US economy demonstrated strength through positive retail sales and tight labour market conditions, the disappointing Q1 GDP print alongside the spectre of a second wave of inflation loomed large.

Despite disappointing Q1 US GDP growth, other leading indicators across the globe pointed to more resilience and a broadening of growth for the manufacturing sector and across previously lagging economies, such as the UK, EU, and Asia. However, rising bond yields, sticky inflation trends, and their impact on the Fed's ability to cut rates in 2024, led to higher volatility in financial markets, particularly in equities.

The commodities surge and currency fluctuations in April highlighted the intricate interplay of economic forces that shape the global investment landscape. Our investment team continues to navigate these uncertain markets, seeking opportunities for growth in our clients' assets through opportunities economic and market volatility present to us.