During the month of May the MSCI World Index $US rose 0.3% and the ASX 200 was down -2.60%.

On the negative side of the equation:
Rising global energy prices pose a threat to the “peak inflation” scenario – with the EU’s ban on the two thirds of Russian oil that it imports by sea and China’s reopening being the latest source of upwards pressure on oil prices. The EU move raises the risk that Russia will cut off some more of its gas exports to Europe in retaliation.
More generally, risks remain around the war in Ukraine potentially widening and Russia’s response to Finland and Sweden seeking to join NATO.
US economic activity data remains mostly strong, as highlighted by May payrolls showing a 390,000 rise – suggesting it’s too early to be confident that the Fed will be able to be less hawkish from September. Consistent with this, Fed Vice Chair Brainard noted that a 0.25% or 0.5% hike in September is more likely than no change.
The Bank of Canada (like the Reserve Bank of New Zealand the week before) hiked rates by 0.5%, warning of more hikes before inflation peaks, highlighting again that central banks are becoming more hawkish.
Another stronger than expected rise in Eurozone inflation to US levels has increased expectations that the European Central Bank’s (ECB) first rate hike will be 0.5%.
On the positive side though:
There are more indications that the US jobs market may start to cool a bit – with the Fed’s Beige Book referring to anecdotes of hiring freezes and wage increases leveling off. Growth in average hourly earnings came in at 0.3% MoM in May, remaining down from the 0.5% MoM pace seen in the second half of last year, suggesting wages growth may have peaked.
China’s reopening following a decline in its COVID cases will start to take pressure off global supply chains. Goldman Sachs Effective Lockdown Index for China had been falling into the end of May and is likely to fall further following the reopening in Shanghai from 1 June.
Reliable indicators of recession have yet to signal one is on the way – e.g., in the US the 10-year less Fed Funds rate yield curve is yet to invert and the Fed Funds rate is still less than nominal GDP growth. It’s the same in Australia.
Forward price to earnings multiples have fallen sharply since the start of the year – down from 22 times to 17 times now in the US and down from 19 times to 15 times in global and Australian shares – making shares cheaper. This has been due to falling share prices and rising earnings.
At its meeting yesterday, the RBA decided to increase the cash rate target by 50bps to 85bps. The last time they hiked by +50bps was February 2000.
The statement signalled some urgency to remove the extraordinary monetary support provided post pandemic. The incremental news since the last meeting was for higher still spot inflation, however they seem comfortable that household balance sheets have a degree of resilience to cope with higher rates. They also appear tolerant of a reasonable fall in house prices noting that they are still 25% above pre-COVID levels. They noted uncertainty around how household consumption responds to higher rates given a negative real income shock, but it seems they are comfortable there are sufficient savings to withstand the first +150-200bps of hikes, after which they could be more cautious. 
“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed... The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead “- Philip Lowe, RBA Governor 7 June 2022.
Share markets have had a bit of a rebound from oversold lows, but investment markets generally remain in a bit of a no man’s land at present. The critical issue for markets is whether inflation can be brought under control by central banks without generating a recession. We think it can be – at least we can’t see a recession for the next 18 months – but right now the jury remains out.
The bottom line is that while shares are likely to be higher on a 6-12 month horizon, it remains too early to be confident that we have seen the highs for bond yields and the lows for shares in the near term.
Australian home prices fell 0.1% in May, with more weakness likely ahead. After a near 30% surge from their pandemic lows, property prices are now starting to fall, led by Sydney and Melbourne, as the drivers of the boom - particularly ultra-low mortgage rates - go into reverse. We continue to expect a 10% to 15% decline in home prices over the next 18 months or so. The downturn in the property market is good news for the RBA, as it indicates that its monetary tightening (which has been underway since last year with the abandonment of cheap bank funding and the 0.1% bond yield target) is getting traction and falling prices will help dampen consumer spending (via negative wealth effects), which will in turn help take pressure off inflation. So ultimately it should help limit how much the RBA needs to raise rates by – we continue to see the peak in the cash rate being around 2-2.5% next year.
Shares are likely to see continued short-term volatility as central banks continue to tighten to combat high inflation, the war in Ukraine continues and fears of recession remain. However, we see shares providing reasonable returns on a 6-12 month horizon as global recovery ultimately continues, profit growth slows but remains solid and interest rates rise - but not to onerous levels.
Still relatively low yields, and the risk of a further rise in bond yields, points to constrained returns from bonds.
Unlisted commercial property may see some weakness in retail and office returns (as online retail activity remains well above pre-COVID levels and office occupancy remains well below pre-COVID levels), but industrial property is likely to be strong. Unlisted infrastructure is expected to see solid returns.
Cash and bank deposits are likely to provide poor returns, given the still low cash rate at present, but they should improve as the RBA raises interest rates further.
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. 
Source: AMP Capital, PIMCO, AZ Sestante.