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.