Global markets exhibited continued volatility in March. Concerns over the ongoing conflict in Ukraine, China Covid restrictions, oil price volatility and inflation’s impact on the consumer remained in focus.
Interest rates continued to move higher led by the US. The key 10-year treasury rate rose from 1.83% to 2.34%. The interest rate curve, measured by the difference between shorter and longer maturity interest rates, moved sharply flatter as shorter maturity rates moved even higher, driven by expectations of US Federal Reserve (Fed) hikes. The 5-year rate moved 74 basis points (bps) higher to 2.46%; above the 10-year rate which typically means the market anticipates a slow down of the economy.
US inflation came in at 7.9%, while unemployment fell to 3.8%. As expected, the Fed started their removal of monetary stimulus with a 25bps hike. Strong economic data, combined with hawkish statements from Fed speakers, led the interest market to price in the expectation of further aggressive monetary policy tightening over the year. The market now expects the Fed to hike 50bps at each of the next 3 meetings.
Locally, 4th quarter GDP was slightly lower than expected at 3.1% as Covid-related disruptions continued to inhibit activity. Inflation and the cost-of-living impacts remain an issue, with both businesses and consumers expecting inflation to head even higher. Businesses also increased their employment intentions which will support an already tight labour market. NZ consumers recorded another low in confidence driven by the outlook for prices and spending power.
The inflation and employment outlook, combined with further pricing of Fed hike expectations, led to an increase in market expectations for RBNZ hikes. The market now expects the RBNZ to hike almost 50bps at both the April and May meetings, with further hikes over the course of the year.
The increase in RBNZ expectations and global interest rates moved wholesale NZ interest rates higher with the 2-year and 5-year leaping by 58bps and 45bps, respectively.
The NZD appreciated 2.6% against the USD over the month. The strength came as commodity prices continued their climb higher and due to the late month rebound in risk sentiment.
The evolution of the tragic war in Ukraine will continue to influence global markets in April. In New Zealand, the RBNZ meeting and 1st quarter CPI print are the key events to watch along with the progress of the country’s re-opening.
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