Inflation and central bank tightening continued to be cause for concern. The US stock market, as measured by S&P500, fell over -7.5% during the month before recovering in the last week of May to close just -0.7% lower. The volatility came as markets tried to gauge the impact of higher interest rates driven by more hawkish central banks. China persisted with lockdowns of major cities which added to both global growth concerns and further supply chain disruptions.
Global inflation continued to measure at multi-decade highs. The US CPI climbed 8.3%, the highest in 40 years. The UK CPI was up 9.3% and New Zealand’s was up 6.9%, a 30-year high. This emphasizes the global inflationary environment we are in, and the reason why we are seeing aggressive monetary policy tightening from central banks.
The US Federal Reserve hiked their benchmark rate by 50bps to 0.75% as widely expected. They also signalled further hikes will follow, likely in the more hawkish 50bps size. The Bank of England hiked rates 25bps to 1%, as expected. The Reserve Bank of Australia joined the tightening cycle with their first hike, taking the cash rate 25bps higher to 0.35% - slightly more than the market had anticipated.
Given inflation and the central bank actions, interest rates begun the month touching new highs, with the 10-year US Treasury rising to 3.20%. However, caution over risk sentiment, the growth outlook, and doubts over the US Federal Reserve’s need to hike rates as aggressively as previously expected, drove interest rates back down. The 10-year US Treasury closed the month -9bps lower, from 2.93% to 2.84%.
After a large fall over April, the NZD initially continued downwards in May, in sympathy with stock markets and risk sentiment. However, the currency manged to recover as concerns eased. It ended the month 0.9% higher at 65c to the USD. Locally, the RBNZ hiked the official cash rate by another 50bps to 2%. The interest rate market was widely expecting this move. However, unlike last meeting, the RBNZ updated their OCR track to indicate a much higher peak in the cash rate. The RBNZ now see the OCR peaking at 3.95% next year (this was previously 3.35% in 2024) – more hawkish than the market expected. The RBNZ did acknowledge that if this peak were achieved, there would likely be cuts back to 3.5%, in 2024.
The RBNZ is clearly concerned they will not get inflation under control without being firm on their commitment. The market now expects the RBNZ to hike by over 150bps, to 3.5%, by the end of this year. If, as many are now expecting, the economy and inflation feel the bite of monetary policy tightening later this year, it is plausible that the RBNZ will not need to hike as far as their OCR track implies.
As discussed last month, the interest rate market already had more hikes than the RBNZ forecasted baked into it. Given this, wholesale interest rates had a muted reaction to RBNZ’s latest OCR increase, with 2-year rates moving 10bps higher and 5-year rates moving -3bps lower.
Looking forward, we expect to see continued volatility. China reopening will be a key milestone for the global outlook. Locally, the markets will be closely watching domestic consumption as the higher interest rates take hold.