Market Update

Although August saw a fair amount of market volatility, stocks swiftly recovered from their initial losses and ended the month on a positive note with the S&P 500 delivering 2.4% in USD returns over the month. Meanwhile, bond markets maintained their upward trajectory as interest rates fell, with the US 10-year yield decreasing by -0.12% to settle at 3.90%.  

US economic data showed signs of weakness with employment reports raising fears of a sharper-than-expected slowdown. This led to declines in equities and interest rates, which were further impacted by a significant drop in the Japanese market. However, markets quickly rebounded after determining the fears were exaggerated.   

The Federal Reserve Bank in the U.S. (the Fed) is likely to start reducing interest rates in September as inflation continues to decline and the economy begins to weaken. Markets anticipate the Fed will at least implement a -0.25% cut, with a 40% chance of a -0.50% cut at the time of writing.  

Australian economic data remained robust. The Reserve Bank of Australia kept Australian interest rates steady (as anticipated) and indicated there would be no rate cuts this year given the strength of the Australian economy.   

At home, the RBNZ initiated its easing cycle by reducing the OCR by -0.25% on the 14th of August. The market largely anticipated this move by factoring in a ~60% probability of a rate cut before the decision was made. Additionally, the RBNZ struck a more cautious tone about future monetary policy, forecasting a lower ‘final’ interest rate than many market participants had expected.   

The initial rate cut, and the accompanying conservative outlook, led to a decline in New Zealand rates. The 2-year interest rate decreased by -0.25%, and the 5-year rate dropped by -0.10%, which are now being reflected in lower mortgage rates. The market now anticipates a minimum of a -0.25% cut at each of the two remaining meetings, with a high probability of a -0.50% cut at the November meeting.  

Expectations of imminent rate cuts in the US, and a recovery in risk assets, outweighed the RBNZ’s rate cut and drove the NZD to appreciate by 5.0% against the USD over the month. 

Markets continue to closely monitor data as it becomes available. US employment figures in early September will influence the Fed's interest rate cut decision later in the month while equity markets will continue to weigh the severity of any potential economic slowdown against the relief provided by the Fed’s monetary policy easing. 

Market Update

In September, the soft-landing narrative grew stronger. Central banks' easing measures and increased risk appetite boosted global equity markets, with China at the forefront. In the US, the S&P 500 ended the month with a +2.0% increase. Bond prices also rose as interest rates declined, with the yield on the US 10-year treasury bond dropping by -0.12% to 3.78%.

Early in the month, US economic data led to conflicting opinions on the likely scale of the Fed's first rate cut. While some indicators suggested a robust economy, weaker employment figures countered this view. The market was divided on whether the Fed would opt for a 0.25% or 0.50% rate cut. In the end, the much-anticipated first US Fed rate cut came with a larger than expected 0.50% reduction. Confident that inflation is stabilising, the Fed showed it is intent on removing restrictive monetary policy. This "front-loaded" easing was intended to bolster the economy and prevent further job market weakness. Updated Fed forecasts indicate a relatively quick rate cut cycle, bringing the Fed rate down to 3.375% by late 2025.

In Australia, economic indicators continued to show strength, with the labour market adding more jobs than anticipated and the unemployment rate maintaining a relatively low level of 4.2%. CPI inflation saw a further decline, bringing headline inflation down to 2.7%. However, at 3.4%, the Reserve Bank of Australia's (RBA) preferred 'trimmed mean' measure remains significantly above their target range of 1-2%. Hence, as anticipated, the RBA kept rates unchanged. They mentioned that they don't expect inflation to fall within the target range until 2026 and reaffirmed that rates will remain steady this year as they monitor progress. With rates more than 1% lower compared to the US and NZ, they have the flexibility to be patient in reducing them.

Data from New Zealand presented a mixed picture, with confidence surveys improving as consumers and businesses felt more positive about the future following the Reserve Bank of New Zealand’s (RBNZ) decision to lower interest rates. GDP for the second quarter saw a contraction of -0.2%, which was better than the expected -0.4% decline. However, broader business surveys indicated that economic activity was still on a downward trend, with both consumers and businesses facing significant challenges. This pessimistic outlook influenced the interest rate market, which is now anticipating a high probability of a 0.50% rate cut by the RBNZ in both October and November.

Global rate cuts, a weakening NZ economy, and the expectation of larger RBNZ rate cuts this year led to lower domestic term interest rates. The 2-year rate fell by -0.35%, and the 5-year rate declined by -0.18%, resulting in reduced mortgage rates.

The dovish Federal Reserve resulted in a weaker USD, which pushed the NZD up +1.60% on the month.

Markets are closely monitoring new economic data and geopolitical uncertainties. The interest rate markets have already factored in a significant easing cycle, which now requires confirmation. Currently, the balance between the pace of rate reductions and the decelerating economy seems to be positive for risk and equity markets.