Global markets posted a strong rebound in July. The US stock market, as measured by the S&P 500, gained 9.2%. Stock markets gained due to stronger than expected corporate earnings and as investor expectations for central bank hikes were trimmed on the back of weakening economic conditions. The US 10-year interest rate moved 36bp lower to 2.65%.
US inflation surprised the market again, with the CPI increasing 9.1% year-on-year. Core measures, which don’t include inflation from energy and food, also surprised the market by increasing 5.9%, but slowed from last months’ 6.0%. However, inflation surveys over the month appeared to show some slowing in expectations of further price increases by producers.
The US Federal reserve hiked their benchmark rate by another 75bp to 2.25%, which was widely expected by interest rate markets. At the time of writing the market was split as to whether the Federal Reserve will increase US interest rates by another 50 or 75bp at their September meeting.
Second quarter US GDP showed the economy slipped 0.9%, far below the 0.5% growth expected by the market. This marks the second quarter of negative GDP growth, which means the US is now in a technical recession. However, in the US this must be declared by the National Bureau of Economic Research. They have yet to declare a recession, one reason they may decide it is not a recession is the strong labour market.
The Bank of England is expected to join other central banks and hike by 50bp this month after UK inflation hit 9.4%.
The Reserve Bank of Australia (RBA) hiked another 50bp to 1.35%, which the markets had been expecting. The RBA was a little less hawkish than the market was looking for, with the RBA acknowledging risks to the economic outlook and that further monetary policy tightening will depend on economic data . Australia’s inflation data later in the month showed inflation was not quite as high as expected at 6.1%. Although it remains one of the lower levels across developed nations, Australia’s inflation is still well above the RBA’s target and going the wrong way - having increased from 5.1% last quarter. This means the RBA will need to continue to tighten monetary policy in the months ahead.
Locally, the Reserve Bank of New Zealand (RBNZ) hiked the OCR another 50bp to 2.50%, as expected by interest rate markets. CPI data confirmed inflation is still an issue when it surprised to the upside at 7.3%. The NZD initially fell over the beginning of the month but recovered later in the month with risk sentiment.
The NZD ended the month 0.5% higher against the USD – a smaller gain than could normally be expected given the moves in equity markets. This was likely due to the souring economic outlook here in NZ and domestic interest rates moving in tandem with US rates. The NZD did however struggle against the AUD, losing 0.5%, as economic outlooks continued to diverge.
Given the RBNZ hike was widely expected, NZ interest rates moved lower with global rates as markets started to think that central banks may not hike as much as initially thought. The NZ 2yr interest rate fell 26bp while the 5yr rate fell 43bp. These decreases in wholesale interest rates enabled mortgage banks to lower their fixed rate offerings. The RBNZ is expected to hike another 50bp at their August meeting.
The trade off between economic growth and central bank inflation fighting will likely cause continued volatility with increasing geopolitical risk adding to the list of concerns
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