Market Update

Global markets continued to rally in March. Equity markets saw healthy gains, with the S&P500 index up +3.1% in USD terms, while US bond yields moved slightly lower, with the US 10-year rate moving down -0.05% to 4.20%. 

Global markets are growing more optimistic of a “soft landing” as US economic resilience continues. US inflation was slightly higher than expected, prompting interest rate markets to taper expectations for interest rate cuts this year. 

The Federal Reserve held their benchmark rate unchanged, and in a dovish surprise continued to signal 0.75% of cuts this year. They raised their projection for the rate at the end of 2025, indicating that higher rates may be needed for longer to tame inflation. The Fed repeated their message that they are looking for more evidence before they decide to cut. Interest rate markets retraced earlier moves higher on the slightly more dovish outlook, with the first cut now expected by July this year. Equities benefited from the prospect of eventual interest rate cuts.

Australia continued to show robust job growth, with the jobless rate surprisingly dropping to 3.7% from 4.1%. Despite the risk of higher wages from the tight labour market, CPI inflation stayed steady at 3.4%, which would have been welcome news for the Reserve Bank of Australia (RBA). The RBA are still waiting for more data before changing their policy, with interest rate markets predicting the first reduction by September this year.

New Zealand has re-entered a recession, as GDP in the 4th Quarter of 2023 fell by -0.1%, after a drop of -0.3% in the previous quarter. This was below forecasts and highlights the ongoing slowdown of the NZ economy. The situation is even worse when we consider the very high population growth driven by net-migration, with GDP per capita down -3.1% over the year. The market now believes that the Reserve Bank of New Zealand (RBNZ) has stopped raising rates, with expectations for the first cut in August this year.

The weak GDP data and late month move lower in global interest rates pushed NZ rates lower. The 2-year rate ended the month down 20 basis points and the 5-year rate was down 18 basis points.

The disappointing NZ data and move lower in NZ interest rates drove the NZD down -1.9%.

Incoming data is still the main focus of global markets as they try to assess if central banks will have room to lower rates this year. After the solid gains in stocks so far, investors are getting more wary of any signs of higher for longer interest rates and an increase in geopolitical risks. 

Market Update

Global markets fell back in April after a strong start to the year. The S&P500 index declined -4.2% in USD terms, while US bond yields moved higher, with the 10-year treasury rate rising 0.48% to 4.72%. 

There is concern in markets that inflation is stubbornly remaining above central bank targets whilst economic growth is becoming sluggish. This means that the global economy may be in a state of stagflation - a scenario characterised by low growth and high inflation, and a difficult situation for central banks to navigate. The threat of stagflation reduced the likelihood of rate cuts this year and dampened risk appetites across markets.  

Data from the US revealed that labour markets remain resilient, raising questions about how the US Federal Reserve will respond. Markets subsequently revised their expectations, and now anticipate that the Fed will only cut interest rates once this year. These new expectations caused interest rates to rise, and equities to fall. Lower-than-expected GDP growth also put pressure on equities.  

In Australia, inflationary pressures continue to weigh on the Reserve Bank of Australia. Australian inflation was reported at 3.6% for the first quarter of 2024, lower than 4.1% in the previous quarter, but above the 3.5% forecast. This led to a significant adjustment of interest rate expectations - the Australian market now sees a 50% possibility of another rate hike this year with no chance of an interest rate cut before 2025. 

New Zealand's economic data, on the other hand, was mixed in April. Inflation was down from 4.7% to 4.0% and in line with forecasts. However, the breakdown showed that non-tradables inflation in fact increased. Higher non-tradables inflation reflects ongoing inflationary pressure in the domestic economy and could mean the RBNZ will maintain rates at current levels forlonger.  

However, business confidence dropped further, indicating a challenging economic outlook. NZ employment data also came in weaker than expected. Employment growth slowing to 0.2% compared to the anticipated 0.3% growth, while the unemployment rate climbed to 4.3%. This employment data is favourable for the RBNZ because it eases the pressure on wage growth and inflation.  

Rising global interest rates pushed NZ rates higher, but to a lesser extent than our global peers due to our weaker domestic data. The domestic 2-year interest rate increased by +0.34% and the 5-year rose by +0.42%.  Stronger US data, risk aversion by investors, and weaker NZ data pushed the NZD down -1.4% over the month.  

Markets continue to focus on macro-economic data to assess when central banks will be able to ease their restrictive monetary policy.