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