Market Update - February 2024


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Market Update

Equity markets saw strong gains in February, with the MSCI World index up 4.3% in USD terms. US bond yields also moved higher, with the US 10-year rate rising by 0.34% to 4.25%.  

US manufacturing and employment data was better than expected, signalling that the US economy remains resilient. Inflation was also higher than expected, which reduced expectations for cuts from the Federal Reserve and pushed US interest rates higher. 

In Australia, a larger-than-expected drop in employment and inflation indicated that the economy is slowing down. As a result, the Reserve Bank of Australia (RBA) left rates unchanged. Markets are now confident the RBA will try to ease rates in second half of 2024. 

In New Zealand, employment data was stronger-than-expected, with the unemployment rate only increasing 0.1% to 4.0% compared to the expected 4.3%. This strong employment data, coupled with a lower-than-expected drop in inflation expectations, meant a few market participants expected the RBNZ to hike interest rates in February. On the other hand, retail sales were down -6.7% compared to the same time last year after adjusting for net migration, suggesting the NZ economy is also slowing under the pressure of high interest rates. 

In the end the RBNZ left the OCR unchanged at 5.50%, as expected by the broader market. In fact, not only did the RBNZ not hike the OCR, but it lowered their expected OCR path by 0.1%. The RBNZ appears to be happy with the progress on inflation to date and may be concerned about the current economic outlook. The RBNZ expects to keep the OCR unchanged this year before cutting next year. The market thinks cuts will happen sooner and is pricing in two OCR cuts later this year.

Domestic rates initially fell -0.25% after the RBNZ announcement, but still ended the month higher. The NZ 2-year and 5-year rates rose by 0.25% and 0.20% in February, respectively.

The prospect of lower interest rates in New Zealand later this year weighed slightly on the NZD, which ended down -0.5% in February. 

Markets are confident that the favourable US economic conditions can continue to support equities. However, there are concerns that inflation may remain stickier than expected, which could keep interest rates higher for longer.