ANALYSIS: US markets had a very strong week last week, with the S&P500, Nasdaq and Dow all making fresh record highs. The three major indices rallied 1.2%, 2.2%, and 1.1% over the course of the week.
The big focus was the Federal Reserve which cut rates for the first time this year, reducing the Fed funds rate by 0.25% to 4%-4.25%. While inflation is still above their target, officials are leaning more towards the risks in the labour market which has been softening. Markets are pricing in two more 0.25% rate cuts this year over the two remaining meetings (in late October and December).
Overall, the world’s largest economy has been resilient, as seen through the US earnings season. Fed Chair Jerome Powell kept his cards close to his chest, but said that there was still a bit of uncertainty about how things will all land, particularly with respect to tariffs. This uncertainty is also evident in the “dot plot” of Fed Members, and the disparity of views amongst officials as to where the Fed Funds rate will land.
Markets were happy with the message delivered by Jerome Powell, and that there were no alarm bells with respect to the economy or the direction of rates. Ultimately, investors appeared relieved that the rate cutting journey in 2025 is underway. In the week ahead, with the Fed in data-dependent mode, there will be a focus on a number of key data releases - US second quarter GDP, durable goods orders, housing and inflation.
The Fed meeting was well received by big tech. Oracle jumped another 4% on Friday on reports that it is in talks with Meta Platforms for a US$20 billion AI loud-computing deal. Apple rose 5% last week. The iPhone 17 went on sale on Friday, attracting the usual long queues at stores across the world. Demand for the iPhone Pro models was strong. There were some comments about some models being prone to scratching but reviews otherwise were generally positive, and particularly around screen size and battery life. The price also seems to be right on the cheaper entry-level model. It has been reported that the tech titan has told as least two suppliers to boost production of the cheaper iPhone 17 by at least 30% after strong pre-orders.
The US earnings season generally delivered more hits that misses, and FedEx was another to impress on Friday. The delivery giant reported results that beat on the top and bottom lines. The company reported net income of US$820 million, compared with US$790 million in the year-ago period. All the more impressive, of course, was that it was a fairly tumultuous quarter for the company with an ever-evolving environment, and much uncertainty around global trade. FedEx moves around 17 million packages through its network daily.
Management said that tariff headwinds to revenue amounted to around US$150 million in the quarter and would amount to some US$1 billion this year. The abolition of the de minimis exemption which meant that shipments under US$800 didn’t attract duties is a big factor. They now do, and this has been particularly relevant for e-commerce discounters such as Temu. It has increased costs, and reduced the number of shipments. The freight segment which FedEx is spinning off next year was also impacted by fewer business-to-business shipments due a softening US economy.
But quarterly revenues at the economic bellwether rose 3% to US$22.24 billion. International volumes fell 3% but those inside the U.S jumped 6% with US consumers continue to gravitate more and more to online shopping. After previously suspending full year guidance, FedEx said it sees revenue growth of 4% to 6 for 2026 – this was much more than the market expected.
FedEx has been also able to boost earnings by reducing costs and making shipping processes more efficient. This includes removing stations from its network and reducing the number of pick-up times overall, and it appears that this hasn’t upset customers as yet. Investors like the release, with the shares up over 2% on Friday. FedEx has been in the eye of the trade storm, falling around 18% this year. Management will be hoping things are settling down on trade front, although as Jerome Powell indicated last week, there is still some uncertainty over where it will all land.
Europe & Asia
In Europe, the STOXX50 rose 1.3% last week, while the FTSE100 was 0.7% lower, but has been trading around record levels. The Bank of England left rates of hold, as did the Bank of Japan.
The central bank in Japan has been an outlier to many other central banks in that it has been trying to keep inflation going rather than stamping it out. Indeed, Japan’s inflation rate eased to 2.7% in August from 3.1% in July. In addition to tariffs, Japan is also dealing with political uncertainty in the wake of the country’s PM resigning. Surprisingly, Japan’s central bank has revealed plans to start selling its holdings of exchange-traded funds. The BoJ is intending on selling its 75 trillion yen stockpile at a pace of about ¥620 billion per year from 2026. That’s equivalent to about US$4.2 billion, but at that pace it will still take the BoJ over a century to get through its ETF holdings. The central bank became the biggest holder of Japanese stocks around 2020, and also after buying up stocks during various crisis in the 2000s. It is now looking to “normalise” its policy. The Nikkei has since gone on to make record highs and is up 15% this year. The unwind will be a gradual one.
Australia
The ASX200 in Australia eased 1.1% last week after hitting record highs in August there has been some profit taking in recent weeks. Meanwhile, the Kiwi market was fairly flat. The NZX50 is tracking well this month, and is up 2.3% so far in September. Freightways, which is held in the Generate KiwiSaver Australasian Fund and Australasian Managed Fund, had a good week, rising over 9%.
New Zealand
Last week’s main data release of note was the June quarter GDP result. While it is very lagged, given that we are nearing the end of September, it did highlight the headwinds that our economy is facing. The economy contracted 0.9% in the three months to June, which was much softer than the 0.3% contraction forecast by the RBNZ, and other consensus views. The manufacturing sector was a particular drag.
The much weaker than expected showing by the economy in the June quarter has increase the prospect of further rate cuts by the RBNZ in what remains of this year. There is now a real chance that officials cut the official cash rate (currently 3%) by 0.50% when they meet October 8. The terminal cash rate now looks to be heading towards 2%. Such a rate track will bring with it much-needed positive transmission effects to the wider kiwi economy for businesses and also consumers - around half of all mortgage holders set to refix their rates in the next 6 months.
The NZ dollar weakened on the release with the prospect of further cuts in the OCR. This will be helpful to exporters which have been a bright spot for our economy this year. On that note, NZ’s monthly trade deficit for August came in at $1.2 billion, which was up from a $716 billion deficit in July. But more positively, taking a broader view, was that on a rolling 12-month basis, the deficit has eased from $3.94 billion to NZ$2.99 billion.
On a year ago basis, the numbers are looking pretty good. Goods exports jumped by 23% compared to August 2024 to $5.9 billion. Dairy and horticulture sectors continue to drive the momentum. Fruit exports surged 57% to $905 million. Kiwifruit exports are going gangbusters, up by $300 million on the same month a year ago to $772 million. Milk powder, butter, and cheese rose $272 million to $1.1 billion. By country exports to China jumped $343 million, the EU by $210 million, Australia by $127 million, and despite all the tariff turmoil, exports to the US were up $96 million. On the other side, goods imports fell by $30 million to $7.1 billion.
This week in terms of economic releases we have NZ consumer confidence numbers due. Full year results from Kathmandu owner KMD Brands will provide a further sighter on the state of the kiwi consumer, while the dairy sector will be eagerly awaiting full year numbers from Fonterra.