February market update 2022

Fears that Russia would invade Ukraine turned to reality in February and this weighed on risk sentiment throughout the month. This caused volatility in global markets to remain high with the US stock market declining -3.1% for the month. The conflict will likely exacerbate near term inflation by further disrupting supply chains and increasing the oil price, which climbed by over +8.6% to finish near $100 a barrel by the end of the month.

Interest rates traded higher, with the 10-year US Treasury rate finishing up 10bps for the month to 1.9%. However, this rate is still down from being over 2% in early February.

Uncertainty over the crisis’ impact on the global economy reduced the market’s expectations for aggressive central bank tightening. The market now expects the US Federal Reserve to raise interest rates by only 25bps in March instead of the 50bps expected before the conflict started.

Locally, the RBNZ continued to remove monetary stimulus by hiking the OCR by 25bps to 1%. The market had been expecting this announcement. Some market participants had even priced in the chance of a 50bps hike given that the latest inflation measurement was at a 31-year high of 5.9%. NZ longer term wholesale interest rates moved approximately +20bps higher over the month after the RBNZ signalled a more hawkish end point for the OCR of 3.25% by early 2024 (assuming their economic forecasts hold true). The interest rate market continues to expect the RBNZ to raise rates again in April and five more times in subsequent meetings this year.

The NZD appreciated +3.4% against the USD over the month. The strength came as the NZD initially rebounded from negative sentiment seen at the end of January. The NZD’s appreciation was lifted further by the hawkish RBNZ as well as by gains in key commodity prices.

Markets will remain acutely focused on Russia’s invasion of Ukraine, and how it impacts commodity prices, inflation, and global risk sentiment.