Market Update - August 2023



Equity markets were weaker in August as the S&P 500 fell -1.8% in USD terms and US interest rates moved higher. Market activity was a little quieter than usual with the northern hemisphere on summer break.

Despite US economic and inflation data showing signs of slowing down, the US Federal Reserve (Fed) reiterated that the fight against inflation is not over yet. The Fed signalled that interest rates may need to remain at higher levels for longer to keep inflation down, prompting
a rise in global interest rates. Consequently, the market expects the Fed to keep rates unchanged in September while they assess the impact of their tightening on the broader economy.

European inflation is proving to be sticky, remaining at an annual pace of 5.3% in August along with an unexpected increase to 0.6% month-on-month. Despite this surprise, the market expects the European Central Bank to keep rates unchanged while they also assess the economic impact of their aggressive tightening so far.

Data from the UK was mixed with better-than-expected manufacturing and GDP data, but weaker retail sales. Unfortunately, wage growth and inflation readings were also higher than anticipated. This data keeps pressure on the Bank of England to keep tightening. The market now fully expects a 0.25% rate increase at their September meeting.

The Reserve bank of Australia (RBA) left rates unchanged in August, despite economists believing another 0.25% rise was needed to dampen their inflation more effectively. However, data at the end of the month showed signs that the RBA’s tightening was starting to gain traction. Wage growth slowed more than expected, unemployment increased slightly, and
inflation fell from 5.4% to 4.9%. Markets expect the RBA to keep interest rates unchanged in September.

In New Zealand, inflation expectations for the next two years unexpectedly increased, highlighting that the RBNZ may find it hard to get the CPI down to their 1-3% target range. Yet the data also showed that long-term inflation expectations beyond two years have fallen, which is a promising result.

Importantly, expected milk payouts to farmers were downgraded in August with global dairy prices continuing to fall. Payout downgrades can have a significant impact on rural communities and the broader economy given the importance of dairy as our leading export product.

As a result, the RBNZ held the official cash rate unchanged at 5.50%, noting they are in “watch, worry and wait” mode. The RBNZ did update their forecast OCR track – they now estimate a 40% chance that another hike will be needed early next year with rates remaining at current levels until at least the end of the year.

The 2yr interest rate ended the month down just -0.05%, and the 5yr rate up just +0.05% because the interest market already anticipated the updated OCR track. The stronger USD and weaker dairy prices put pressure on the NZD, which fell -3.9% over the month.

The market remains focused on the “soft-landing” outcome, hoping that global central banks have done enough to tame inflation without too much damage to the consumer and economy. Evolving economic data will be the judge of this.