November was a volatile month as markets grappled with central bank actions to combat inflation and on-going doubts over economic growth from Covid restrictions.
Both stock and interest rate markets ended the month relatively unchanged as early increases were given up later. The main mover was the NZD which fell 4.8% to the lowest level since last November. The reduced expectations of RBNZ hikes, the USD strength from increased expectations of US Federal Reserve hikes and lower global risk sentiment created a perfect storm for NZD weakness.
The general theme of central bank tightening continued with the US Federal Reserve formally starting to taper their QE programme. This is seen as their first step toward normalizing monetary policy, with interest rate hikes expected to come mid next year. The Fed has shifted their view on inflation, reflecting signs that inflation may become more persistent than initially expected.
Locally, the RBNZ increased the Official Cash Rate by 0.25% to 0.75%. The market was divided on if they would move by 0.25% or 0.50% at this meeting given the recent strong inflation and employment data. In the end, the RBNZ decided to adopt a more cautious approach. After the large moves in interest rates in October, the market took some comfort in the RBNZ’s stance and short-term interest rates moved lower. However, a further hike is still expected in February.
This cautious approach was justified with the emergence of the Omicron Covid variant. Regardless of how Omicron develops, the emergence of a new Covid variant highlights the uncertain times we are in.