Market Update - May 2023



May was a relatively stable month for Global Markets. US economic data was broadly in line with expectations and concerns over the US debt ceiling were muted. The S&P500 ended the month up just +0.2%. The tech heavy NASDAQ ended up +7.6% on the back of strong performance from companies with exposure to AI applications. US interest rates moved higher, with the 10-year up +0.22% to 3.65%.

Concerns over the US debt ceiling and the risk of a government shut down or default on debt payments remained relatively contained, especially from the stock market’s perspective. This was proven correct as the US Government came to an agreement to avert any issues, suspending the debt limit for 2 years.

US economic data held up, with activity indicators and employment data slightly above expectations and inflation slightly lower than expected. The US Federal Reserve hiked rates by 0.25%, as expected by the market. They hinted to a pause in the hiking cycle at the June meeting to assess the impact of monetary policy to date but retained a data dependent, hawkish bias. 

The Reserve Bank of Australia (RBA) surprised the market by hiking 0.25% to 3.85%. After the previous month’s pause, the market was pricing in only a 12% chance of a hike. The RBA attributed the decision to inflation being “still too high” and labour costs continuing to rise. The RBA also noted that further tightening may be required, and that like the US Federal Reserve, they will be driven by the data. Economic data later in the month showed a surprising jump in the unemployment rate, but also a worrying increase in inflation, with CPI rising more than expected to 6.8% from 6.3% the prior month. 

In New Zealand, the Reserve Bank (RBNZ) surprised the market, but this time with a dovish outlook. They hiked the Official Cash Rate (OCR) by 0.25% to 5.50%, which was broadly expected, however they did not increase the OCR forecast track, leaving it at 5.50%. The RBNZ also said the decision was between a pause or 0.25% hike, whereas the market had been expecting it to be a consideration between 0.25% or 0.50%. This signalled the end of the tightening cycle, with the bank noting that the large amoount of monetary tightening to date is starting to show more signs of slowing the economy. 

NZ interest rates had a large move higher in the lead up to the RBNZ on the back of stronger migration data, which drove economists to expect the RBNZ to hike further. After the RBNZ downplayed this, and left the OCR track unchanged, rates retraced the bulk of this move with 2-year interest rates ending just +0.11% higher and 5-years +0.12% higher over the month. 

The dovish RBNZ and negative China sentiment drove the NZD -2.6% lower over the month. 

Much like central banks, markets remain data dependent, with a focus on US Treasury borrowing post the debt-ceiling being resolved. This is because large amounts of borrowing are likely to push interest rates higher and may deprive some U.S. regional banks of some much-needed funding. Locally, interest rate markets will be watching economic data to gauge the impact of tightening to date on consumer spending, inflation, and if 1Q GDP marks a technical recession.