Mark LaMonica: Welcome to another edition of Morningstar Minute. I’m joined by Matt today, so we are recording this the day before. We’re going to get a CPI reading. And obviously that’s going to be a big input into what the RBA does in May. So what are market expectations for inflation.

Matt Wilkinson: Yeah. So the local market is expecting inflation to come in quite strong. Obviously there’s been energy-related inflation coming through. So that expectation is for inflation to be strong and outside the band of 2 to 3%. And this will likely lead the RBA to really consider, as the market is expecting in May, that interest rates will rise by 25 basis points.

Matt: So that’s looking like it’s on the cards. That’s what the market is saying at the moment.

Mark: One thing that’s interesting is obviously we’ve had a lot of geopolitical risk. We’ve had inflation worries. We’ve had some economic worries. But in general markets continue to do well. One place they haven’t done as well is Australia. So can you talk a little bit about what’s going on in the Australian market?

Matt: Yeah, it’s been an interesting one in that markets initially rebounded following ceasefire discussions involving Iran, which is a good thing. I think markets are pricing in a little bit more risk, particularly in Australia, as we haven’t seen the Australian market bounce as high. Financials, particularly banks, have struggled a little bit in a relative sense.

Matt: Share prices are still quite high and valuations on banks are quite stretched in our view. But US markets are hitting all-time highs. The Nasdaq and S&P 500 have rebounded very strongly. Emerging markets in particular as well have rebounded strongly, and largely I think that’s due to local financials.

Mark: And you mentioned US markets. US markets, after a dip, have continued, as you said, to hit all-time highs and are performing really well. What’s the Morningstar view from a valuation perspective on US markets?

Matt: We think US markets are stretched from a valuation perspective, particularly the tech and tech-related sectors, showing very high multiples. The sustainability of that—we think those multiples are pricing in very good returns, pricing for perfection, as I say, looking forward. So we are cautious on the US market as a whole.

Matt: But there are certainly pockets globally as well where we see valuations that are far more attractive.

Mark: We talked about CPI reading tomorrow and the RBA, but we’re also going to hear from the Federal Reserve this week. What are market expectations for what’s happening with inflation and Federal Reserve policy in the US?

Matt: In contrast to the RBA and the local market, the Fed are expected to keep interest rates on hold. Inflation expectations are nowhere near as bullish over there, and inflation is far more contained according to market watchers. So we’re not expecting rates to rise, and that’s leading, as a side effect, into currency movements as well.

Matt: The Aussie dollar has been very strong—not only versus the US dollar, but also across a range of other currencies: the euro, the British pound, and the Japanese yen, for instance.