February Market Update 2023

Global equity markets had a relatively volatile month over February. Following a widely expected 0.25% increase in rates, many investors believed that the Federal Reserve (the Fed) could soften its approach to fighting inflation after its Governor, Jerome Powell, indicated that the rate of inflation may be easing. Many investors interpreted Powell’s remarks as evidence that the Fed planned to stop raising interest rates soon, and markets rallied as a result.

This sentiment reversed later in the month when economic data showed that US economy was stronger than expected. The US added more jobs over the month, unemployment fell, and wage growth was higher than expected. A strong US economy suggested that inflation may persist longer than initially estimated, with members of the Fed believing that rates need to go higher for longer before inflation will be tamed.

This stance was justified when US inflation for February was measured at 6.4% over the past year. The market is now expecting more Fed hikes in 2023, while the chances of any interest rate cuts seem to have disappeared for now. The S&P 500 index ended the month down -2.4% in USD terms and the US 10-year Treasury Bond interest rate rose 0.41% to 3.92%.

Both the Bank of England (BoE) and the European Central Bank (ECB) increased their rates by 0.5%, in line with market expectations. Inflation remained above 10% in the UK and 8.5% in Europe, which led the central banks to signal that there are more hikes to come. However, the BoE hinted that they may be near the end of their hiking cycle.

The New Zealand economy continued to slow as reflected by the slight rise in domestic unemployment to 3.4%. Unemployment is still at historically low levels as businesses struggle to find employees and wage inflation remains elevated. The outlook is even more uncertain given the effects of Cyclone Gabrielle and the Auckland floods, both of which will slow short-term economic activity and cause pockets of inflation. However, the long-term rebuild will add to an already capacity-constrained economy.

The RBNZ raised the OCR by 0.5% to 4.75% in their first meeting for 2023 despite the recent uncertainty. The RBNZ left their OCR projection unchanged with a peak of 5.5%, as expected. The announcement had little impact on markets because interest rate markets already moved higher in line with the US. The 2 year NZ interest rates ended the month 0.5% higher, with the 5-year increasing by 0.64%.

The RBNZ also pointed out that interest rate markets, such as the 1 year and 2-year rates, price in expectations of RBNZ rate hikes. Therefore, while the RBNZ has signaled more OCR hikes in the months ahead, these are already “in the price”.

The USD appreciated over the month due to the strong US economic performance, and higher US interest rates. The NZD ended the month down -3.96%, offsetting the negative US equity moves for New Zealand investors.

The markets continue to be very data driven, looking for any signs that inflation may peak or persist. We expect this to continue to fuel market volatility over the near term.