CFS Market Update: March 2023

What’s happened recently? 

• Major central banks raised rates
• Banking crisis rescue
• Signs inflation may have peaked in Australia
• Strong resilience in equities.

Why did these things happen? 

Central banks across the world remained resolute in their determination to fight inflation. In the US, data released in the lead up the Federal Reserve’s (Fed) March meeting offered few unambiguous signs – it pointed to inflation still being elevated. It was a similar case in Europe.

As a result, the Fed and the European Central Bank went ahead with rate hikes during the month.

In Australia, the Consumer Price Index (CPI) showed inflation has moderated more than expected. However, striving to balance economic growth and inflation, the Reserve Bank of Australia (RBA) increased interest rates by 0.25%.

March also saw instability in the banking sector with the collapse of two small US banks and a crisis with Credit Suisse. Central banks intervened quickly to mitigate concerns that the crisis would spread. US authorities took prompt action to prevent a domino effect of bank failures by safeguarding depositors. In the case of Credit Suisse, the Swiss National Bank stepped in and brokered a deal for UBS to take over the troubled bank.

It is well worth noting our banks operate in a tighter regulatory environment with stricter oversight. To reassure markets and consumers, Australian regulators confirmed that Australia’s financial system remains well capitalised and has strong liquidity coverage.

The bond market experienced elevated volatility in March, propelled by inflation, credit and liquidity concerns, as well as a sharp repricing of the outlook on rates. The MOVE index, which tracks bond market volatility, reached levels not seen since the global financial crisis.

Is there good news?

The RBA flagged declines in clothing and footwear, household furnishing, equipment and services costs, as evidence that inflation has peaked. This is a sign that the interest rate rises are weighing on consumer spending and is a good indicator that rate rises may be paused or at least proceed at a slower pace.

Despite a modest March, equity markets finished the quarter on a positive note, showing strong resilience. Most major markets saw a gain, and the ASX All Ordinaries stayed relatively flat. In contrast, other Asia Pacific regions outperformed, led by the Hang Seng and the Japanese Nikkei.

What could lie ahead?

It continues to be all about the data. 

The next few months will likely show persistently strong inflation data in the US and Europe. This could make it challenging for the Fed to implement rate cuts and suggests the European Central Bank will continue hiking rates.

In Australia, we’ll be watching keenly at the next RBA Board meeting to see whether the interest rate rises have sufficiently dampened inflation and how that may influence the actions of the Board.

What should I do if I’m concerned about my investments?

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).