Equity market volatility continued in September as the S&P500 fell -4.9% in USD terms and US interest rates increased to levels not seen in over a decade.
US inflation was slightly higher than expected, rising at an annualised pace of 3.7%. This increased concerns that inflation is starting to become difficult to budge, and that the US Federal Reserve (Fed) will need to maintain higher rates for longer. The +9.8% increase in oil prices added to inflationary worries and pressure on consumer spending.
The Fed held rates unchanged, as broadly expected. However, the tone of the statement and press conference was interpreted as hawkish. Committee members did not rule out further tightening and their forecast for the Fed funds rate at the end of 2024 was increased in line with the higher for longer rhetoric. At the time of writing, the market was pricing a 32% chance of an interest rate hike at the November meeting.
The European Central Bank (ECB) increased rates +0.25%. The decision was not unanimous and appeared to be a precautionary tightening due to concerns over sticky inflation. The ECB revised down their GDP and inflation forecasts and noted that this level of rates will be sufficient to weigh on inflation, essentially saying they are now done hiking. The market expects the ECB to leave rates unchanged for the remainder of the year.
The Reserve Bank of Australia (RBA) left rates unchanged as expected. The board debated between keeping rates steady or hiking +0.25% but concluded that recent data had been consistent with inflation returning to target. The RBA did acknowledge that further tightening may be required should inflation prove more persistent than expected. After the meeting, economic data was generally stronger. The market does not expect a hike in October but does expect a further +0.25% hike by March next year.
In New Zealand, GDP was stronger than expected, with 2Q growing at +0.9% vs +0.4% expected. This will be concerning for RBNZ, who are worried that inflation is becoming sticky. However, on closer inspection, it was apparent that many of the factors that drove GDP higher will either not be repeated or will be reversed in the coming months.
As a result of stronger GDP and the move in global rates, NZ 2-year rates ended the month +0.29% higher and the 5-year rate finished up +0.41%. Despite the general risk-off tone over the month and general USD strength, the NZD managed to gain +0.5% on the USD.
The markets appear to have grasped onto what central bankers have been warning for some time – higher rates for longer. This sentiment is unlikely to shift until we get a clear sign that inflation will return to the target range.