Market Update - November 2023

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Market Update


The main theme in November was easing economic momentum and slowing inflation, as intended by the monetary policy tightening to date, leading some of the key global central banks to signal the potential end of rate hikes and interest rate markets moving to expect rate cuts in 2024.


Global share markets ended their 3-month slide with the best performing month of the year, while US bond yields experienced a huge reversal. After hitting 15-year highs in October, the key US 10-year rate moved down -0.60% to 4.32%. The shift in interest rates and associated easing in financial conditions propelled both bond prices and equity markets higher, with the S&P 500 up +8.9% in USD terms.


US economic data showed signs of softening, most importantly inflation, which fell more than expected from 3.7% to 3.2%. The Federal Reserve (Fed) left rates unchanged and signalled that data would be key to the future path of rates. The subsequent data over the month prompted some Fed speakers to acknowledge that interest rates may have peaked, with the Fed likely to remain on hold before cutting next year. The weaker data and ‘Fed speak’ prompted the interest rate market to price in over 4 cuts by the end of 2024.


In Europe, economic momentum continued to moderate, and inflation fell further than expected from 2.9% to 2.4%. This reading will be welcomed by the European Central Bank (ECB). Like the US Fed, the ECB is likely to hold rates steady before cutting next year, with interest rate markets pricing in almost 5 cuts by the end of 2024.

The Reserve Bank of Australia (RBA) increased rates by +0.25% to 4.35% in early November. The hike was widely anticipated by the market after the prior month’s higher than expected inflation number. The RBA retained a slightly hawkish bias, noting the future path of rates was data dependent. Since the meeting, data has been slightly weaker, and inflation fell further than expected to 4.9%. Interest rate markets expect the RBA to hold rates steady over the next year.


In New Zealand, data continued to moderate. The unemployment rate increased from 3.6% to 3.9% as expected. Food prices and inflation expectations fell. The Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 5.50%, as anticipated. However, they surprised the market with a more hawkish outlook, increasing their future OCR forecast. The RBNZ now see a greater chance of another hike in 2024 (76% vs 36% in August). The bank also expects rates to be higher for longer, with rates at these levels until early 2025. The hawkish stance is somewhat at odds with the recent data and global central banks. The interest rate market had begun to pre-empt RBNZ cuts by pricing in over 2 cuts next year. It is possible that the RBNZ sought to reinforce that interest rates are not coming down any time soon for fear that lower rates could reignite inflation. They also noted their concern that non-tradable inflation in the service sector could prove to be sticky at levels above the target range.


Despite the more hawkish RBNZ, global interest rates set the tone for NZ rates. The 2-year rate decreased by -0.39%, whilst the 5-year rate (which is more affected by global rates) decreased by -0.56%. Given the RBNZ’s tough stance, interest rate markets have reduced their expectation of rate cuts next year. However, considering the global outlook and direction of local economic data, the market is still pricing in a cut by the end of 2024, earlier than the RBNZ expects.


The weaker US data, expectations of Fed cuts, hawkish RBNZ and positive risk tone drove the NZD up +5.67% over the month.


With economic data heading in the right direction for many central banks to be comfortable that further monetary tightening is not required, investors will be gauging the extent of the slow down, with hopes that a soft landing is possible


Market Update - December 2023

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Global markets ended the year on a positive note as momentum in financial markets continued. The main theme remained resilient economic data and slowing inflation, culminating in the US Federal Reserve signalling more rate cuts for 2024 than expected.


Share markets continued to rise, while US bond yields continued to move lower with the US 10-year rate moving down -0.45% to 3.88%. The expectation of lower rates and associated easing in financial conditions drove both bond prices and equity markets higher, with the S&P 500 up +4.4% in USD terms.


US inflation slowed as expected, falling from 3.2%. to 3.1%. The Federal Reserve (Fed) left interest rates unchanged, but signaled a potential 0.75% of cuts in 2024, which is 0.5% more than they projected in the September meeting. The forecasts also showed that no Fed members expect any further rate rises. As always, the Fed pointed out that the path of rates is data dependant, but they are comfortable that their tightening has done enough to bring inflation back down.


US interest rate markets had already been expecting cuts in 2024, but the surprise move by the Fed to acknowledge that more cuts are possible this year gave the market comfort the Fed is about to start normalizing interest rates.


The Reserve Bank of Australia (RBA) followed the Fed’s lead and left rates unchanged at 4.35% after hiking in November. The hold was widely expected by markets. The RBA noted they are seeing encouraging signs that inflation is easing, and they are happy to wait and assess data as it comes. Interest rate markets expect the RBA to remain on hold for the first half of the year before cutting in June.


In New Zealand, data continued to suggest that the economy is slowing. GDP contracted by -0.3% between June and September 2023, representing a -0.6% decrease from the previous year. The annualized fall in GDP was much weaker than the 0.5% of growth expected by the market. This downside surprise is in line with the negative sentiment around the economy coming from the higher cost of living and pressure from rising interest rates. The result is even weaker when adjusted for population growth, which would put the annual contraction at -3.1%.


As a result, the market expects the RBNZ to start cutting rates by May with over 1% of cuts priced in over 2024. The market seems to be pushing back on the RBNZ’s reluctance to lower domestic interest rates with global inflation slowing, NZ GDP falling and other central banks signaling potential cuts in 2024.


The shifts in interest rate expectations saw the 2-year rate decrease by -0.57% and the 5-year (being more influenced by global rates) decrease by -0.68%.


The increased expectation of US Federal Reserve cuts drove the USD down, pushing the NZD up 2.66% over the month.

While easing inflation and resilient economic data may continue, markets already appear to be quite convinced that a soft landing can be achieved. Investors will be keenly watching the flow of data to assess how likely a soft landing really is.


Watch our Investment Update - December 2023 (video)

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Watch our Investment Update - December 2023 (video)

Watch our latest Investment Update video to hear Global Equities Research Analyst, Daniel Cloete, give us an update on the performance of the global markets at the end of 2023 and look into what we can expect in 2024.



Please tune in and let us know what you think.


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Some of the key takeouts from the video include:


  • The World Index went up 4.8% in December while the SP500 went up 4.4% after US Federal Reserve suggested that interest rates might decrease in 2024.
  • 2023 was a good example of why it’s important to stay the course even when things look tough. The World Index increased 22% after falling 19% in 2022, despite widespread predictions of a global recession – the lesson is that global markets can rebound quickly!


  • Markets are still debating whether there will be a hard landing or a soft landing.


  • Our portfolios are positioned to respond to either hard landing or soft landing scenarios because we have the tools ready to deploy in either situation.


  • December inflation data for the US was a little higher than expected, but global markets shrugged this off and remain very close to achieving all-time highs.
     


Market Update - January 2024

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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.


Watch our Investment Update - January 2024 (video)

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Watch our Investment Update - January 2024 (video)

Watch our latest Investment Update video to hear our Fixed Income Portfolio Manager, Ayrton Oliver, give us an update on the bond market and his predictions on where interest and mortgage rates are heading in 2024. January's update was hosted by our adviser Stephanie Whittaker.



Please tune in and let us know what you think.


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Some of the key takeouts from the video include:


  • After a volatile 2023, interest rate markets have now made up their mind that central banks have done enough to tame inflation and that interest rates are coming back down – but volatility will remain as new economic data comes in.
  • Inflation is the key data point; central banks need to see this come back to target. Employment is also important as it can lead to inflation via wages, especially in services which are currently a focus of central banks.
    Data this year has been resilient, the US economy appears healthy with data beating expectations. Inflation has been falling, but not fast enough for the Federal Reserve to declare victory yet. In New Zealand inflation has also fallen, but the domestic driven component remains a concern for the RBNZ. Employment data has been stronger than expected, driving wage increases. We are not expecting any rate cuts just yet.
  • Global interest rate markets have got a little bit ahead of themselves, pricing in the expectation of multiple rate cuts this year, more than central banks have alluded to. In response to the stronger data, there is a risk that we see central banks cut rates later than currently expected.
  • The end of the hiking cycle will be welcomed news for bonds, mortgage rates and equities, but given markets are already factoring in cuts it might be a while until we see further moves lower in interest rates.
  • Any changes to the resilient economic outlook, such as a financial or geo-political shock, or the consumer slowing more than expected could mean interest rates need to be cut sooner and deeper than currently forecast, a positive for bonds but this could weigh on equities.

     


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