Likewise, wages growth, although cooling, remains robust. The most recent S&P purchasing managers’ index (PMI) are perhaps most telling. After trending downwards for most of 2022, the flash S&P composite PMI rose to 53.3 in March, up from 50.1 previously, and tells a similar story of strength in services.
Domestically, inflation pressures continue to paint a somewhat different picture. The most recent labour force report showed a large bounce in employment and a fall in the unemployment rate to 3.5 per cent from 3.7 per cent previously.
However, retail sales were softer at +0.2 per cent month-on-month and the monthly CPI continued to cool, rising 6.8 per cent in the year to February 2023. With inflation pressures less advanced than overseas, the Reserve Bank of Australia made the decision to pause its tightening cycle in April - although it has firmly noted that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.
From a market perspective, equity and bond markets continue to push different narratives. Yield curves have fallen dramatically since the demise of SVB, inferring that economic conditions are soon going to become troublesome.
Conversely, equities are yet to fully price the possibility of recession and are either looking through or unwilling to accept such a gloomy outlook. Earnings expectations are still discounting the expected pressure on margins and falling demand that would likely hit in such an environment.
For context, US earnings per share have fallen 23 per cent on average over the past four recessions. Currently that metric is down only 6 per cent.
So, is the equity market or bond market right? The answer probably lies somewhere in the middle. But with an elevated level of uncertainty currently permeating markets and with central banks appearing to lean towards prioritising price stability, we remain defensive across portfolios this month.
Last month, we increased our global and domestic bond allocations just prior to the sharp retracement in yields. This has served portfolios well since and both positions have drifted higher again owing to outperformance.
Although we expect yields to have likely peaked in the US, further monetary tightening is expected across the globe, and with risks elevated we have again increased our targets for both positions. As a result, we hold onto our positioning this month and have become more defensive across portfolios overall.
We are underweight in risk assets and mildly underweight in both Australian and domestic shares within portfolios. Across defensive assets we retain our preference for Australian bonds and cash this month.
Click here to read the full 2023 Outlook report
Lakshman Anantakrishnan is Head of Investment Strategy, Private Banking & Advice at ANZ.