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.

Global stock markets enjoyed a strong rally in June. The S&P 500 increased +5% in local currency terms to hit all-time highs. The technology tilted index (NASDAQ) climbed +6.3%. A weaker USD resulted in the S&P 500 returning 2.7% in NZD terms. Bonds also posted gains as the US 10-year interest rate ended the month -0.17% lower.

There was a brief shift in sentiment mid-month due to the Israel-Iran conflict and concerns about its escalation. However, even with US involvement, the conflict ended quickly, and markets responded positively.

US economy

US economic data presented a mixed picture. CPI inflation continued to decrease while business and consumer survey data indicated some weaknesses in the economy. However, the US' unemployment rate remained relatively stable.

The Federal Reserve (Fed) decided to leave interest rates unchanged, in line with the market's expectations. Additionally, the Fed maintained their forecast to implement two additional -0.25% rate cuts by the end of this year. However, the Chairman of the Federal Reserve, Jerome Powell, took a more cautious tone during his press conferences, indicating that the Fed was content to observe the impact of tariff-related inflation before making further adjustments.

Despite Powell's cautious stance, other members of the Fed expressed their willingness to lower rates further if CPI inflation continued to trend downward. In addition, comments from President Trump regarding the appointment of a new 'pro-growth' Fed Chair also helped drive interest rates lower. These comments, along with the announcement of various trade deals, helped deliver tailwinds for stocks and bonds late in the month.

Australian economy

Data out of Australia indicated a deceleration in economic activity as both GDP and CPI inflation fell short of estimates. However, the unemployment rate remained steady at 4.1%, and there was significant growth in the number of full-time positions added. In addition, the decrease in headline inflation to 2.1% gives the market confidence that the Reserve Bank of Australia (RBA) can proceed with their expected rate cuts. The market is currently anticipating an 80% probability of a -0.25% rate reduction in July.

NZ economy

New Zealand's economy continued to demonstrate minimal growth with survey data indicating ongoing weakness. GDP showed a slight +0.8% increase for the first quarter, but this small growth follows a long period of stagnant or negative growth. Currently, interest rate markets are factoring in only a 16% probability of a cut in the Official Cash Rate (OCR) by the Reserve Bank of New Zealand (RBNZ) in July, with most economists anticipating that the RBNZ will opt to pause and reassess the situation. However, the market is estimating that the RBNZ will need to implement further cuts later on, projecting at least one more -0.25% reduction by December and a significant likelihood of an additional cut early next year.

New Zealand term interest rates reflected anticipated future RBNZ rate cuts and aligned with global trends. The 2-year and 5-year rates decreased -0.11%. The New Zealand dollar increased +2.23% due to persistent USD weakness.

Looking ahead

Global markets are closely monitoring geopolitical risks and the progress of the "Big Beautiful Bill" in the United States. Additionally, US employment data will be pivotal in determining the potential for further interest rate cuts later this year.