Global markets had a challenging month with negative returns across the vast majority of asset classes. The US stock market declined 8.8% and bond prices continued to fall. The market faced multiple headwinds over the month including continued COVID-19 restrictions in China, ongoing war in Ukraine, economic caution due to increasing interest rates and lacklustre US corporate earnings.
Interest rates reached new highs for the year, led by moves from the US. The 10-year treasury rate rose from 2.34% to 2.93%, US inflation hit 8.5% and the Federal Reserve ramped up their intention to tighten monetary supply in the coming year. These factors mean the market now expects the Fed to raise interest rates by 50bp at their next meeting in May. The interest rate market is pricing in a small chance of a 75bp rate hike. The market expects meaningful interest rate increases over the next 12 months as the Fed fights to contain inflation.
The NZ dollar plunged 7% over the month, which cushioned the negative returns from offshore stocks. The strengthening US dollar was the main catalyst for this, driven by the expectation that the Fed will accelerate rate hikes faster than initially expected. The market’s negative sentiment towards risk also weighed the NZ dollar down..
Locally, the RBNZ raised the official cash rate by 50bps to 1.5% mid-way through the month - a move that was widely expected by the market. The RBNZ left their long-term OCR guidance unchanged from February, signaling that they believe larger, front loaded interest rate increases should temper inflation..
The RBNZ’s decision to increase the pace of monetary tightening was justified by a spike in inflation across the first quarter with consumer prices increasing by 6.9% since the March quarter last year. This inflation rate is at a 30-year high and is rightly a concern for the RBNZ. The market now expects the RBNZ to raise the OCR by another 50bp in May with further rate increases expected at each subsequent meeting this year. .
New Zealand’s wholesale term interest rates increased further, reflecting the market’s expectations about further interest rate hikes in New Zealand and across the OECD. The 5-year wholesale term interest rate jumped 51 basis points. The interest rate market is now overshooting the RBNZ’s predicted OCR path. It will be interesting to see whose forecasts are more accurate..
Central bank tightening, and its impact on consumer demand and inflation, will be in focus this month. Central banks around the world have a delicate task on their hands - trying to bring inflation back under control without decelerating the economy too quickly.