Global stock markets experienced significant swings in April. The S&P 500 declined by over 13% early in the month but recovered to close down 0.9% in local currency terms. A weaker USD resulted in an S&P 500 return of -5% in NZD terms. Bonds also showed increased volatility, but the US 10-year interest rate ended the month only 4 basis points lower.

The announcement of global tariffs by President Trump, referred to as “Liberation Day”, led to significant market reactions. Many countries faced higher than anticipated tariff levels, resulting in a widespread risk-off sentiment and increased volatility. US equity markets declined, bond yields rose, and the US dollar depreciated. Initially, investors were very concerned about the potential impacts on business, global trade, and economic growth.

However, these concerns eased over the month as the Trump administration extended the implementation timeframes, and held discussions with trading partners. This provided reassurance to the markets that the initial headline tariffs are unlikely to represent the final outcome particularly for the countries saddled with the highest tariffs.

US economy

Recent US economic data indicated weakening conditions, raising concerns about the potential impact of tariffs on growth. This situation has prompted discussions regarding whether the Federal Reserve should consider easing its policies. While interest rate markets do not anticipate a rate cut at the May meeting, they do foresee further easing measures later this year.

Australian economy

The Reserve Bank of Australia (RBA) maintained interest rates at 4.1%, as anticipated. They are monitoring further developments, awaiting additional inflation data and observing how global uncertainty led by the US progresses. Interest rate markets anticipate a 0.25% cut by the RBA in late May. Australian employment data was on the softer side vs expectations while CPI was slightly higher than excepted.

NZ economy

The Reserve Bank of New Zealand (RBNZ) cut rates by 0.25% in April to 3.50%, as expected. They noted high uncertainty and warned of growing downside risks to growth. CPI inflation rose slightly more than expected to 2.5%, due to some “one-off” price increases, which shouldn’t be a major concern for the RBNZ. Business confidence continued to decline due to the geopolitical ructions.

At the RBNZ’s May meeting, markets expect another 0.25% rate cut, with a detailed Monetary Policy Statement highlighting downside growth risks and the likelihood of further rate cuts.

NZ term interest rates fell, boosting bond prices. 2-year rates dropped 34 basis points and 5-year rates declined 27 basis points.

Despite risk-off sentiment, lower New Zealand interest rates, and increased volatility, the USD lost favour among investors. Consequently, the NZD appreciated by 4.53%.

Looking ahead

Global markets are closely monitoring Trump's trade policies for indications of relief, as well as US economic data to assess potential impacts on growth. Many of the world's central banks have meetings scheduled this month, beginning with the US Federal Reserve. Investors will be paying close attention to how central banks respond to the current volatility.

Global stock markets bounced back in May. The S&P 500 increased +6.2% in local currency terms. The technology tilted index, the NASDAQ, climbed +9.6%. A slightly weaker USD resulted in an S&P 500 return of +5.6% in NZD terms. Bonds continued to experience increased volatility; the US 10-year interest rate ended the month +0.24% higher.

Markets responded positively to a reduction in trade tensions, as the enforcement of tariffs was postponed and nations engaged in efforts to negotiate trade agreements with the United States. This alleviated concerns over potential trade wars and contributed to a market recovery, surpassing pre-Liberation Day levels.

US economy

US economic data showed resilience with more jobs added than expected and the unemployment rate steady at 4.2%. CPI inflation was below expectations. The Federal Reserve kept rates unchanged but suggested a more hawkish outlook, noting potential stagflation risks due to tariffs. Interest rate markets now anticipate -0.25% cuts in September and December.

Australian economy

Australian economic data indicated continued strength, with employment surpassing estimates. The Reserve Bank of Australia (RBA) lowered interest rates by -0.25% to 3.85%, as expected. The statement was more dovish than anticipated as the Board noted they considered reducing rates by -0.50% but chose caution due to uncertainty and inflation remaining at the upper end of the target band. Interest rate markets estimate an 80% probability that the RBA will cut rates again in July.

NZ economy

New Zealand's unemployment rate remained stable at 5.1%, which was lower than an anticipated increase to 5.3%. This stability was attributed to a decrease in the participation rate as more people left the workforce. The overall trend suggests a weakening employment market, with wages growing slower than expected. This development aligns with the Reserve Bank of New Zealand's (RBNZ) objectives related to inflation.

The Government also announced this year’s Budget; as expected, it is one of fiscal constraint. The Treasury also downgraded its growth outlook and increased its projected borrowing requirements. A tighter budget is likely to impact the economy and, other factors being equal, allow the RBNZ to continue lowering rates.

The RBNZ reduced interest rates by -0.25% during their May meeting, in line with expectations. The central bank acknowledged increased uncertainty and examined various scenarios that could influence future monetary policy, including potential demand shocks or inflation supply shocks. Their baseline projections indicate that the Official Cash Rate (OCR) may be reduced by an additional -0.25% to -0.50% over the coming year. Interest rate markets had previously anticipated further reductions of -0.50%, resulting in a slight revision of expectations. Markets now anticipate one more rate cut, with a minor possibility of an additional cut, by the year's end.

New Zealand term interest rates reversed their April decline, aligning with global rates and improved risk sentiment. 2-year rates rose by +0.24%, and 5-year rates rose by +0.25%. The New Zealand dollar appreciated by +0.47%.

Looking ahead

Global markets remain significantly influenced by US trade relationships, particularly with China. Additionally, close attention is being paid to any indications of an economic downturn in the United States. In June, the primary local economic data events will focus on the GDP of Australia and New Zealand. As always, geopolitical risks continue to linger in the background.