January Market Update 2023
Global equity markets enjoyed a strong start to the year. The MSCI World Index (in local currencies) ended the month up 7.1%, as investors started to focus on the potential for a “soft landing” and the US Federal Reserve (Fed) nearing the end of their tightening cycle. This also saw interest rates move lower, with the US 10-year down -0.37%.
The initial optimism that US inflation may have finally peaked came as US employment data showed average hourly earnings slide from 5.1% to 4.6%, below expectations of 5%. This was further confirmed with US CPI at 6.5%, as expected, down from 7.1%. The markets became more convinced that the Fed would only need to hike to a lower level and potentially cut rates later this year, after softer services and retail sales data.
The Fed meets in early February and is expected to slow the pace of interest rate increases to 0.25% increments. Market participants will be very keen to hear the tone of the press conference for any hints that the Fed believes it has managed to control inflation and may not need to tighten monetary policy as much as previously thought.
Both the Bank of England (BoE) and the European Central Bank (ECB) also meet in February, and are expected to deliver 0.5% interest rate hikes, as inflation in Europe remains over 9%, although, much like the rest of the world, signs of slowing economic growth and pressure on the consumer are coming through.
In New Zealand, economic data continues to deteriorate. House sales and prices continue to fall and business surveys show businesses are extremely pessimistic about the outlook. Unfortunatly, pricing and inflation pressures remain evident, with more businesses expecting prices to increase than last quarter.
The New Zealand CPI was slightly higher than expected by the markets at 7.2%, but notably lower than the RBNZ’s forecast of 7.5%. This was the catalyst for interest rates to move lower as markets factored in that the RBNZ’s November OCR track was based on higher than actual inflation expectations.
NZ employment data also showed some weakness. Despite remaining around record lows, and businesses noting finding staff as one of their main capacity constraints, the unemployment rate moved up to 3.4%. Wages grew 8.1%, down from 8.6%, and much lower than the RBNZ’s expected 9.1%. This is heading in the right direction and should give the RBNZ some comfort that we are not stuck in a wage-price inflation spiral.
The CPI and employment data were enough to see the major bank economists all cut their outlook for the Official Cash Rate (OCR) this year, expecting a smaller 0.5% hike in February and a lower peak around 5.25%. The interest rate market moved to price this in with the 2-year rate down -0.45% and the 5-year down -0.60%.
Despite the lowering of NZ interest rate expectations, global risk sentiment with equities posting strong gains and the US interest rate market also moving lower saw the NZD post a 1.42% gain vs the USD over the month.
The market remains volatile, the fight against inflation is not over yet and even if global central banks are able to stop hiking this will likely be because the economy has slowed, and consumers have come under pressure. We remain cautious into this backdrop, with economic data playing an increasingly important role in influencing the market outlook, alongside upcoming corporate earnings and forward guidance.