Global markets experienced another volatile month. The US stock market posted strong gains mid-month (S&P 500 up +4.7%) after US inflation data showed some initial signs of slowing (0% for July, though still 8.5% year-on-year). However, this was unwound as markets turned their focus to the Jackson Hole central bankers’ meeting and the Federal Reserve’s monetary tightening. The S&P 500 ended the month down -4.1% while US 10-year interest rates increased 54bps to 3.19%. Probably the most anticipated event of August, the Jackson Hole Economic Symposium, saw the Federal Reserve Bank restating their commitment to getting inflation down, whatever it takes – so-called hawkish rhetoric. This reminder increased expectations of future rate hikes and a slowing of the economy, which spooked equity and risk markets, driving a large decline in stock markets to erase the month’s gains and then some.
The US has a few key economic data points printing in September, with August CPI and retail sales coming out before the Fed meets toward the end of the month. At the time of writing, the interest rate market was predicting another 75bps hike.
Over in Europe, with CPI running at 9.1%, the European Central Bank also ramped up their hawkish comments, with members suggesting a 75bps hike cannot be ruled out at their next meeting. Given the large increases in energy costs, now widely accepted as a European energy crisis which could see energy rationing and factories forced to run at lower capacity over the winter, the ECB is also in a tough spot. They need to bring inflation down, but the risks of hurting the economy when it is already suffering are very high. This is likely why the ECB is considering ‘front-loading’ rate hikes with more in the near-term, meaning less tightening to be required over the long run. The ECB is expected to hike 75bps in September.
The Bank of England also hiked rates by 50bps, as expected, up to 1.75%. Like continental Europe, energy prices are expected to continue to put pressures on households and inflation – with one forecaster expecting to see 18% inflation by next year. The BoE is expected to hike at least 50bp in September, with markets also pricing in the chance of 75bps.
The Reserve Bank of Australia hiked 50bps, as expected. However, the tone was a little more on the dovish side, with the RBA leaving the door open to slowing the pace of tightening in future meetings. The Australian economy appears to be holding up relatively well, with inflation running at lower levels than global peers and confidence in the outlook for the economy increasing over the month. The interest markets expect an 80% chance of another 50bps hike in September.
Locally, the Reserve Bank of New Zealand hiked the OCR another 50bps to 3.00%, as expected by interest rate markets. They also increased their OCR track, which now suggests a peak of 4.10% compared to 3.90% in May. The RBNZ, like the Fed, made it quite clear they are resolute in their goal to get inflation back down. Interest rate markets expect the RBNZ to hike another 50bps in October and are already factoring in the OCR reaching a higher level than the RBNZ’s forecast. This may suggest that there is more limited upside to longer dated yields moving forward.
Like equities, the NZD rallied in the middle of the month on the positive risk tone and decreased expectations of US Fed rate hikes. This was also unwound in tandem with the global stock sell off and more hawkish Fed. The NZD ended the month down -2.5%, providing some cushion to global equity investors.
At the risk of sounding like a broken record, markets will be carefully watching the trade-off between central bank hiking to slow inflation and the slowing economy. And there are plenty of other risks to the global economy aside from rising interest rates – the European energy crisis, the sky rocketing US Dollar, and the state of the Chinese property market to name a few – so we continue to hold more cash than usua