Global equity markets continued to climb, with the S&P500 index rising +3.1% in USD over the month. US interest rates edged higher with the 10-year treasury bond yield up +0.12% to 3.96%.
Markets are becoming increasingly optimistic of a “soft landing”, where inflation comes back in to target range while the economy remains resilient. Data over the month reinforced this view, as US GDP and other activity indicators beat expectations. On the other side of the equation, CPI inflation slowed to 3%, more than expected, and a welcome outcome for the Federal Reserve (Fed).
The Federal Reserve increased interest rates 0.25%, as widely expected. The run of positive economic data gave them confidence they could hike to ensure inflation continues its downward trajectory, without risking too much economic damage. The Fed are now firmly in a data-dependent mode, watching inflation, employment, and economic growth indicators to decide if another hike is necessary in September. Markets and economists now broadly believe there is a high probability that the Fed is finished with its hiking cycle.
The European Central Bank (ECB) also raised interest rates another 0.25%. Of note, they changed their language around future rate hikes, joining the Fed in noting future decisions will be dependent on the data over the coming months. Markets are generally expecting the ECB to have also finished hiking for this cycle.
The Bank of England (BoE) hiked 0.25%, as expected, but there were some in the market expecting a 0.50% increase given the persistence of high inflation in the UK. Like the other central banks, the BoE emphasised their data-dependent outlook and that they remained concerned about upward pressure on inflation. Markets are pricing a 60% chance that they hike again in September.
The Reserve Bank of Australia (RBA) decided to hold rates unchanged again, as broadly expected. Despite relatively high inflation and ever stronger employment, the RBA want to assess the impact of rate rises to date and the evolving economic outlook. Markets are not expecting the RBA to hike again. The cautious approach from the RBA saw Australian 2-year rates move -0.2% lower.
In New Zealand, June quarter CPI fell from 6.7% to 6%, slightly higher than the 5.9% expected. Although in line with Reserve Bank of New Zealand (RBNZ) expectations, the data exhibited signs of domestic inflation remaining sticky. The RBNZ will be closely watching this; but for now the market does not expect another hike, nor do the RBNZ in their published OCR track. However, rates are likely to remain higher for longer unless we see inflation move materially lower.
New Zealand interest rates ended the month with relatively small changes. 2-year rates were unchanged and 5-year rates were up just +0.07%. The NZD appreciated +1.37%, mainly as a result of USD weakness driven by positive risk sentiment.
With most central banks now in wait-and-see mode, the evolution of data will be closely watched, with markets hoping inflation has been tamed without an economic hard landing.