Market Update

Global markets had a relatively slow start to the year, tracking sideways for the first half of January as investors digested economic data but then picked up momentum in the second half. Equity markets saw decent gains, with the S&P500 index up +1.6% in USD terms, while US bond yields had a round trip after initially climbing higher, with the US 10-year rate moving up just +0.03% to 3.91%. 

US economic data was stronger than expected, signalling a resilient economy. Inflation unexpectedly increased in December, which drove interest rates higher as investors reduced the magnitude of interest rate cuts expected this year.

The US Federal Reserve (Fed) left interest rates unchanged, acknowledging they have seen encouraging signs that inflation is under control, but indicating a reluctance to declare victory for the time being. Like many central banks, they are concerned that core inflation (e.g. from services) is proving stickier than hoped. The Fed Chairman poured cold water on the idea of an interest rate cut as early as March, as they wait for more data to gain confidence that inflation will continue to move back to target. The interest rate market remains well ahead of the last Fed projections, pricing in 5 cuts.  

Australian economic data continued to deteriorate, with employment and inflation data both falling more than expected. This gave interest rate markets comfort that the Reserve Bank of Australia has completed its hiking cycle and will be looking to ease rates later this year.

In New Zealand, headline inflation fell from 5.6% to 4.7% as expected by the market, but by more than the Reserve Bank of New Zealand (RBNZ) had forecast. However, in the details, the decline was mainly driven by falls in tradeable inflation. Non-tradeable inflation was stronger than expected and will be a concern to the RBNZ who are worried that domestic service driven inflation is not coming down as quickly as they would like.

A speech by the RBNZ’s Chief Economist late in the month reiterated that the RBNZ remains comfortable with current monetary policy settings. Until they are more confident that inflation, especially domestic non-tradable inflation, is heading back toward the target band they are unlikely to begin cutting rates.

Interest rate markets still expect the RBNZ to cut rates over 3 times this year, which is at odds with RBNZ’s, admittedly old, November forecasts of no cuts in 2024. The central bank will meet at the end of February and will provide the market with a new set of forecasts incorporating the new data received. 

The stronger than expected non-tradable inflation data pushed rates higher. The 2-year rate moved up +0.1% and the 5-year up +0.19%.

The resilient US data and the interest rate market’s reduction in Fed cut expectations saw the USD appreciate, pushing the NZD down -3.2% over the month.

Markets are confident that the US economy in particular remains resilient. However, while inflation continues to ease, central banks have shown concern that core measures may be difficult to get back into range. Investors will be keenly watching data with the hope that they can gain confidence of their expectations that there will be multiple interest rate cuts this year.

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. 

Market Update

Global markets continued to rally in March. Equity markets saw healthy gains, with the S&P500 index up +3.1% in USD terms, while US bond yields moved slightly lower, with the US 10-year rate moving down -0.05% to 4.20%. 

Global markets are growing more optimistic of a “soft landing” as US economic resilience continues. US inflation was slightly higher than expected, prompting interest rate markets to taper expectations for interest rate cuts this year. 

The Federal Reserve held their benchmark rate unchanged, and in a dovish surprise continued to signal 0.75% of cuts this year. They raised their projection for the rate at the end of 2025, indicating that higher rates may be needed for longer to tame inflation. The Fed repeated their message that they are looking for more evidence before they decide to cut. Interest rate markets retraced earlier moves higher on the slightly more dovish outlook, with the first cut now expected by July this year. Equities benefited from the prospect of eventual interest rate cuts.

Australia continued to show robust job growth, with the jobless rate surprisingly dropping to 3.7% from 4.1%. Despite the risk of higher wages from the tight labour market, CPI inflation stayed steady at 3.4%, which would have been welcome news for the Reserve Bank of Australia (RBA). The RBA are still waiting for more data before changing their policy, with interest rate markets predicting the first reduction by September this year.

New Zealand has re-entered a recession, as GDP in the 4th Quarter of 2023 fell by -0.1%, after a drop of -0.3% in the previous quarter. This was below forecasts and highlights the ongoing slowdown of the NZ economy. The situation is even worse when we consider the very high population growth driven by net-migration, with GDP per capita down -3.1% over the year. The market now believes that the Reserve Bank of New Zealand (RBNZ) has stopped raising rates, with expectations for the first cut in August this year.

The weak GDP data and late month move lower in global interest rates pushed NZ rates lower. The 2-year rate ended the month down 20 basis points and the 5-year rate was down 18 basis points.

The disappointing NZ data and move lower in NZ interest rates drove the NZD down -1.9%.

Incoming data is still the main focus of global markets as they try to assess if central banks will have room to lower rates this year. After the solid gains in stocks so far, investors are getting more wary of any signs of higher for longer interest rates and an increase in geopolitical risks.