Global equity markets ended last week mostly softer, with rotation away from recent winners emerging as the dominant theme.
Mega-cap and technology stocks lagged while smaller companies, healthcare and property names showed relative strength.
Rotation was also seen in bond, FX and commodity markets with bonds and the US dollar generally rallying, while hopes of a Middle East resolution led to weakness in previously strong commodity prices including oil.
The S&P 500 fell by 1.9%, while the ASX 300 dropped modestly by 0.8%. Brent crude fell 10.6% alongside gold, which dropped 3.4%.
In Australia, we saw May CPI data which showed inflation to also be elevated but not accelerating.
Similarly, labour force data indicated that the economy was steady, allowing the RBA more time to assess the current situation before deciding on the next course of action on rates.
In the US, markets continued to look for data that would indicate the next direction of action by the Federal Reserve under new Chairman Kevin Warsh.
The most recent Personal Consumption Expenditure (PCE) inflation data continued to be elevated but not enough for the market to price in substantial rate hikes.
Other economic metrics indicate the economy to be slowing but not alarmingly so.
Australian macro/economic
The two key data releases last week: the May CPI and the Labour Force report – were keenly watched to give a better understanding of the RBA’s likely next course of action.
The May CPI surprised to the downside with headline inflation decreasing 0.7% month-on-month (vs consensus -0.4%), taking the yearly growth down 20 basis points (bps) to 4.0% (consensus 4.3%).
The downside was driven by falls in domestic and international travel costs, while core housing components continued to firm, with new dwelling prices up 0.9% and rents up 0.4% for the month.
Meanwhile, the trimmed mean rose 0.4% for the month, lifting the yearly rate 20bps to 3.6%.
Thursday’s Labour Force data showed the unemployment rate fell 13bps to 4.36% in May, broadly in line with expectations. Total employment rose 40,300, above the consensus of 32,500 though the trend in job creation has been moderating since 2023.
Hours worked fell 1.1% for the month but remained 0.5% higher year-on-year. Job vacancies declined 2.1% for the quarter.
Together, these prints suggest a lower second quarter peak for inflation than previously assumed in the RBA’s Statement on Monetary Policy, which forecast a headline of 1.4% quarter-on-quarter and trimmed mean at 1.0% quarter-on-quarter.
Some market observers believe that this data increases the likelihood of the RBA staying on hold after three rate hikes into slowing activity and housing momentum.
RBA Deputy Governor Andrew Hauser also noted during the week that a resolution of the Middle East conflict could lower global oil prices and reduce fuel costs for Australian households.
Markets ended the week pricing approximately a 25% probability of a rate increase at the August meeting, and around 60% odds of at least one further move by year-end.
US macro/economic
Similar to Australia, this week’s data releases were scrutinised to give an indication of the central bank’s next move under new Chairman Warsh.
The most important release was the May update of the Fed’s preferred metric of inflation: the PCE price index.
Core PCE came in modestly better than many expected at 0.3% month-on-month, taking the year-on-year rate to 3.4%.
Core Goods was negative for the month as we move through 2025 tariff impacts, while Core Services ex Housing showed an energy impact via airfares.
The result was interpreted mildly dovishly, with markets trimming implied rate hike expectations modestly. Current pricing suggests just over 1.4 hikes by year-end 2026.
Other data releases included New Home Sales which fell to 580,000 in May, below the consensus of 640,000.
Rising unsold inventory points to further price declines ahead.
The combination of slower population growth, high mortgage rates and low consumer confidence is continuing to throttle residential construction though the new “21st Century ROAD to Housing Act” seeks to reverse the housing sector sluggishness.
US Jobless Claims offered a mixed signal.
Initial claims fell to 215,000, below the 225,000 consensus, though likely influenced by the Juneteenth holiday. In contrast, continuing claims rose above consensus to 1.821 million.
Markets
Overall market sentiment remains mixed with only a couple of indicators being close to recent highs
The notable theme was a broadening rotation in both size and sector.
The Russell 2000 small-cap index outperformed both the S&P 500 and the NASDAQ and healthcare and REITS were higher.
The “Magnificent 7” group of mega-cap technology stocks are testing important technical support levels as they are now down approximately 5% year-to-date as a group, while the broader S&P 500 remains up around 8%.
Semiconductor stocks including SK Hynix, Samsung and Micron also saw elevated volatility after recent strong runs.
The high-profile IPO of SpaceX retreated around 17% from the prior week’s highs, with many participants remaining sceptical of the durability of its price strength.
While the overall Australian equity market returns were only slightly down, we saw significant dispersion in various market components during the week.
Large caps held up while mid and small-caps delivered negative performances. At the sector level resources were clearly weak while there were signs of rotation into other sectors such as consumer, healthcare and REITS.
Commodities and FX
Commodities were generally weaker partially due to ongoing US dollar strength and potential resolution in the Middle East.
Oil led the declines falling back close to pre-Iran conflict levels. This is despite the ongoing confusion on the status of US-Iran negotiations this week.
The order of events was the US-Iran talks opening in Switzerland, Iranian negotiators then departed after 18 hours of discussions, JD Vance hailed “great progress” in negotiations, and then the US launched strikes in Iran after reports of a tanker being struck in the Strait of Hormuz – with Iran subsequently retaliating with missile and drone strikes on Kuwait and Bahrain.
Gold continued its weakness from its US$5,500 highs earlier in 2026, briefly dipping below US$4,000 during the week and now approximately 10% lower month-to-date.
Another key factor to watch is the developing strength in the USD.
The USD has been flat to down over the last year and now just reached its 12-month highs.
Dollar strength is a non-consensus view at the moment which can lead to further outsized moves if market participants are caught wrong-footed with their positioning.
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