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. 

Market Update

Global markets fell back in April after a strong start to the year. The S&P500 index declined -4.2% in USD terms, while US bond yields moved higher, with the 10-year treasury rate rising 0.48% to 4.72%. 

There is concern in markets that inflation is stubbornly remaining above central bank targets whilst economic growth is becoming sluggish. This means that the global economy may be in a state of stagflation - a scenario characterised by low growth and high inflation, and a difficult situation for central banks to navigate. The threat of stagflation reduced the likelihood of rate cuts this year and dampened risk appetites across markets.  

Data from the US revealed that labour markets remain resilient, raising questions about how the US Federal Reserve will respond. Markets subsequently revised their expectations, and now anticipate that the Fed will only cut interest rates once this year. These new expectations caused interest rates to rise, and equities to fall. Lower-than-expected GDP growth also put pressure on equities.  

In Australia, inflationary pressures continue to weigh on the Reserve Bank of Australia. Australian inflation was reported at 3.6% for the first quarter of 2024, lower than 4.1% in the previous quarter, but above the 3.5% forecast. This led to a significant adjustment of interest rate expectations - the Australian market now sees a 50% possibility of another rate hike this year with no chance of an interest rate cut before 2025. 

New Zealand's economic data, on the other hand, was mixed in April. Inflation was down from 4.7% to 4.0% and in line with forecasts. However, the breakdown showed that non-tradables inflation in fact increased. Higher non-tradables inflation reflects ongoing inflationary pressure in the domestic economy and could mean the RBNZ will maintain rates at current levels forlonger.  

However, business confidence dropped further, indicating a challenging economic outlook. NZ employment data also came in weaker than expected. Employment growth slowing to 0.2% compared to the anticipated 0.3% growth, while the unemployment rate climbed to 4.3%. This employment data is favourable for the RBNZ because it eases the pressure on wage growth and inflation.  

Rising global interest rates pushed NZ rates higher, but to a lesser extent than our global peers due to our weaker domestic data. The domestic 2-year interest rate increased by +0.34% and the 5-year rose by +0.42%.  Stronger US data, risk aversion by investors, and weaker NZ data pushed the NZD down -1.4% over the month.  

Markets continue to focus on macro-economic data to assess when central banks will be able to ease their restrictive monetary policy.  

Market Update

Global markets resumed their upward trend in May, boosted by optimism about easing inflation and a resilient economy. Stock markets rose, with the S&P500 index increasing +4.8% in USD terms and the Nasdaq, which has more technology stocks, rising +6.3%. Bonds also advanced as interest rates dropped, with the US 10-year rate declining -0.18% to 4.50%.

As anticipated, the US Federal Reserve (Fed) did not alter the Fed Funds Rate. The Fed is still concerned about getting inflation back to 2% but believes that the next change in rates will be lower.

US data was encouraging for taming inflation. Job growth was a bit weaker than forecast with slower wage rises. Inflation measures kept easing, and economic activity signs all showed a cooling economy, which will hopefully result in further disinflation. Interest rate markets anticipate the Fed to start reducing rates by November.

The Reserve Bank of Australia (RBA) kept rates steady and repeated their neutral position. Australian economic data has revealed some worrisome signs of stagflation, with employment, consumer and construction activity weakening more than anticipated while CPI inflation unexpectedly rose. Markets do not anticipate the RBA to have room to cut rates this year. 

New Zealand's economic indicators keep worsening. Unemployment increased more than forecast, business and consumer confidence declined further, and construction activity dropped. The positive news is that inflation expectations also eased.

As anticipated, the Reserve Bank of New Zealand (RBNZ) kept rates steady, but they signalled a more hawkish stance, pointing out the dangers of domestic non-tradable inflation being more persistent than expected. They repeated that they do not foresee reducing the OCR until the latter half of 2025. 

NZ rates fell along with global interest rates, but the RBNZ's less dovish stance kept shorter-term rates from dropping materially. 2-year interest rates decreased by -0.04% and 5-year by -0.10%.

The NZD had a very strong month, boosted by the cooling US economic data, positive risk sentiment and the RBNZ's more hawkish outlook. It rose +4.3% against the USD and +1.5% against the AUD.

Some important economic events coming up in June are the US CPI print, the Fed meeting and the NZ GDP release. Investors will be looking at the data for clues on the timing for when central banks can start cutting interest rates. 

Market Update

Global markets continued to rally in June as the US economy remained resilient and global inflation moderated. The S&P500 index rose 3.5% in USD terms, and the technology-oriented Nasdaq climbed 6.2%. Bonds also delivered positive returns as interest rates fell with the US 10-year rate decreasing -0.1% to 4.45%.  

Economic data from US manufacturing and services sectors showed signs of optimism with job creation exceeding expectations and inflation falling. The improved economic data boosted investors’ confidence in the US economy’s growth potential while lower-than-expected inflation raised hopes that the Federal reserve will begin cutting interest rates later this year.  

For the moment though, the Federal Reserve left interest rates unchanged in June, which came as no surprise to the markets. At the same time, Federal Reserve members lowered their expected interest rate cuts to only one -0.25% cut this year - down from the three cuts expected at the beginning of the year. However, Federal Reserve members simultaneously raised their expectations for cuts in 2025 and are now projecting up to -1% worth of interest rate cuts next year. This ‘higher for longer’ stance is a reaction to the improved economic outlook and an inflation level that, despite growing more slowly than last year, remains above target. Ultimately, inflation data is still moving in the right direction and interest rate relief is expected before the end of the year.  

There was no change in the Reserve Bank of Australia’s (RBA) stance in June due to a worrying rise in CPI inflation to 4% from 3.6%. Australia’s higher-than-expected inflation has led investors to consider the possibility that the RBA may have to raise interest rates again soon. Despite this, the Australian economy continues to show signs of strength, which may be contributing to their sticky inflation. 

New Zealand's economy worsened with domestic manufacturing and service surveys hitting lows not seen since the COVID pandemic. Households faced more pressure in June and consumer confidence dropped. The economy grew 0.3% in the first quarter, slightly above estimates, but this is still negative on a per capita basis. The economy will likely continue to struggle over the next few quarters.    

NZ rates fell faster than global peers in June due to the deteriorating outlook in domestic economic conditions. Two-year interest rates decreased by -0.14% and five-year rates decreased by -0.16%. The NZD weakened -0.83% against the USD over the month, driven by a stronger USD and weak NZ economic data.  

Key events to watch in July include the RBNZ meeting, NZ and US CPI (inflation) data, and Australian employment. 

Market Update

Global markets experienced renewed volatility. There was a shift away from the technology sector and from large cap stocks in the US markets, leading to a -1.6% decrease in the Nasdaq index, versus the S&P 500 rising by +1.1% and the Russell 2000 gaining +10.6%. Bond markets sustained their upward trajectory amidst declining interest rates, with the US 10-year yield dropping by -0.37% to reach 4.03%.

Mixed signals emerged from the US economy, with manufacturing and services surveys declining, but employment numbers exceeding forecasts. Inflation slowed more than expected. This combination of cooling activity and subdued price pressure has stoked anticipation that the Federal Reserve (Fed) will reduce interest rates in the coming months. The Fed kept interest rates steady at month's end, as expected, but hinted at a potential rate cut in September if the trend of declining inflation persists. 

Australian economic indicators have notably changed outlooks. As anticipated, the unemployment rate rose to 4.1%. Earlier this year, inflation prompted predictions of more rate hikes from the Reserve Bank of Australia (RBA), but recent data proved milder than forecasted, leading to a significant drop in interest rates as markets dismissed any hike expectations. The RBA is now predicted to maintain current rates in August.

As anticipated, the Reserve Bank of New Zealand (RBNZ) maintained its official cash rate in July, although the Monetary Policy Statement that followed was more dovish than previous ones. The RBNZ acknowledged the effects of stringent monetary policy on the economy and indicated their expectation for inflation to return to their target range later in the year, which would permit them to begin easing monetary policy by cutting rates.

Subsequent inflation figures supported these predictions with a larger-than-expected drop in CPI to 3.3% from the previous quarter's 4.0%.  Interest rate markets expect the RBNZ to start a rate-cutting cycle as early as their August meeting.

The change in stance by the RBNZ led to significant declines in NZ rates, surpassing those seen in global rates. 2-year interest rates fell by -0.77% and 5-year by -0.61%, with these shifts beginning to be reflected in reduced mortgage rates.

The NZD was also weaker over themonth, down -2.31% against the USD, thanks the dovish RBNZ and weaker NZeconomic data. 

Investors are increasingly worriedabout a widespread global economic downturn. Central banks are starting toreduce interest rates, with the extent and pace heavily influenced by incomingdata. In New Zealand, the upcoming employment figures will be closely observedbefore the RBNZ's meeting.

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.