June was a weak month for global share markets, as concerns over rising inflation and the risk of economic recession increased. The US stock market, as measured by the S&P 500, declined 9.0%.
US inflation surprised the market, with the May CPI print increasing 8.6% year-on-year. This was higher than expectations and the prior month figure of 8.3%. Somewhat worryingly, core goods inflation also increased, despite earlier signs of easing supply chain constraints and cooling demand. This presents the risk that inflation could become more entrenched. The UK’s inflation also printed at multi-decade highs of 9.1%.
The surprise inflation print sent interest rates higher as markets begun to expect even more aggressive monetary policy tightening from the US Federal Reserve. The interest rate on 10-year US Treasuries moved from 2.85% to nearly 3.50%. This caused concern over the impact of higher rates on the consumer and equity markets, fuelling recession fears and weakening stock prices. This concern ultimately resulted in rates moving back down from the highs, US Treasuries ending the month at 3.01%.
The US Federal reserve hiked their benchmark rate by 75bps to 1.50%, which was generally expected by the interest rate markets. Markets are split on whether the Fed is going to hike another 50bps or 75bps this month, but interestingly interest rate markets are already predicting rates to start to come back down from early next year – signalling that the Fed will achieve its goal of slowing inflation and the economy relatively quickly. The Bank of England also hiked their official rate by 25bps to 1.25%, as widely expected. The bank has been relatively more cautious in removing monetary stimulus due to recession fears.
Closer to home, the Reserve Bank of Australia continued their hiking cycle in June with a 50bps move to 0.85%, more than markets had been expecting. Australian economic data has been holding up relatively well, allowing the RBA to be more hawkish.
Locally, New Zealand economic data continued to sour. 1Q GDP fell 0.2% quarter-on-quarter, far below estimates of 0.6% growth. It’s worth noting this data was disrupted by the Omicron outbreak. Business and consumer confidence also fell, with the latter declining to a record low since the series begun in 1988. The increasing cost of living, interest rates and general sentiment all weighed on consumers and their spending intentions. Unfortunately, both businesses and consumers are still expecting high inflation.
The NZD fell 4.1%, hitting a fresh 2 year low just under 62c, the move helping to cushion global stock market losses for NZ investors. The weakness was driven initially by the increases in US interest rate expectations, then was weighed on by negative global risk sentiment.
NZ interest rates also had a volatile month but ended relatively unchanged, as the market is already factoring in a significant amount of RBNZ hikes to come. NZ wholesale interest rates moved 8bps higher in both 2-year and 5-year tenors, leading to small declines in bond prices. The RBNZ is expected to hike another 50bps this month.
Looking forward we expect further volatility as global markets remain focused on signs that inflation is turning or economies are heading for recession, to gauge the level of further central bank tightening required and its impact on the consumer.