Global equity markets enjoyed a strong month in June, rising 4.9% in USD over the month. US interest rates also moved higher with the 10yr treasury bond yield up 0.19% to 3.84%.
Recent data suggests that the US economy remains resilient while inflation is easing. The US labour market remains tight, GDP growth beat expectations, and CPI data suggests inflation is slowing in line with expectations. These data points gave the market optimism that the Federal Reserve may tame inflation without a “hard landing” for the economy.
The Federal Reserve left interest rates unchanged at their June meeting as they assess the impact of the tightening so far. Despite the positive economic data, markets still expect another 0.25% interest rate hike in July after cautious commentary from Federal Reserve members.
The European Central Bank (ECB) also raised interest rates another 0.25% with signs that European inflation slowed. The ECB is expected to hike rates another 0.25% in July because inflation is still in the mid-5% range.
There’s a different story developing in the UK, with criticism mounting that the Bank of England (BoE) has been too slow to contain inflation. Inflation in the UK remains one of the highest amongst major economies at 8.7%. This persistent inflation prompted the BoE to raise their interest rates by 0.5% to 5%, which was more than the 0.25% expected by the market. Investors are now pricing in the chance of another 0.50% hike in August.
The Reserve Bank of Australia (RBA) likewise decided to increase rates another 0.25% to 4.10%. Data showed that Australia’s labour market remains very strong with the unemployment rate dropping to 3.6%. The RBA decided it was prudent to continue increasing interest rates to make sure inflation does not become entrenched. Australia’s CPI results in June showed inflation fell from 6.8% to 5.6%, but the drop was primarily driven by decreasing fuel prices. Details of the CPI data showed that domestic inflation remains high. Markets are pricing a small chance that the RBA will raise rates further in July, with economists split on whether there’s a need for another further hike at all.
In New Zealand, 2nd Quarter GDP declined 0.1%, putting New Zealand into a technical recession as the impact of the RBNZ’s tightening is starting to show. On a positive note, business and consumer confidence rebounded, albeit from low levels. Surveys also showed declines in pricing and inflation expectations, which will be welcome news for the RBNZ. The market expects the RBNZ to hold rates steady at their July meeting, inline with the RBNZ projections from their May meeting.
New Zealand interest rates moved higher alongside global interest rates with 2yr wholesale rates up 0.30% and 5yr wholesale rates up 0.27%. The NZD gained 1.71% due to USD weakness and generally positive risk sentiment.
With more economic data being released across July, markets will be trying to assess whether central banks have done enough to end the monetary tightening cycle whilst avoiding a hard landing.