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.