Market Update
Global stock markets fell slightly in December, but the depreciation of the NZD mitigated this decline for New Zealand-based investors. The S&P 500 fell by -2.4% in local currency but rose by +3.4% when measured in NZD. US mid-sized stocks experienced the most significant decrease, erasing gains from the US election with an -8% drop in USD terms.
There was a divergence in global bond prices with US bond prices decreasing as the 10-year US Treasury yield increased by +0.4% to 4.57%. Conversely, New Zealand bond prices increased over the month due to a decline in local interest rates.
Concerns about increased government borrowing and inflation from Trump’s proposed tariffs led to higher US interest rates as investors sought compensation for potentially higher rates of inflation going forward. Despite this, the Federal Reserve cut the interest rate by -0.25% as expected, but their forward-looking guidance indicated a more cautious approach. The Fed signalled fewer future cuts than the market had anticipated, which subsequently weighed on global equity markets.
Meanwhile, the Australian economy gave us a mixed picture. GDP growth for the third quarter was reported at 0.3%, falling short of the anticipated 0.5%. Confidence indicators declined as both consumers and businesses expressed growing frustration with the Reserve Bank of Australia's (RBA) hesitance to cut interest rates. Nevertheless, the labour market demonstrated resilience, with the unemployment rate unexpectedly decreasing from 4.1% to 3.9%, contrary to expectations of an increase to 4.2%. The Reserve Bank of Australia (RBA) kept rates steady, but their cautious commentary led the market to anticipate a rate cut in February.
New Zealand's economic data continued to trend downwards. GDP significantly underperformed expectations, registering -1% for the third quarter compared to the anticipated -0.2%. The previous quarter's figures were also revised downward from -0.2% to -1.1%. This data led to a reduction in interest rates as the Reserve Bank of New Zealand's (RBNZ) tighter monetary policy has evidently had an economic impact. Consequently, the RBNZ is expected to lower interest rates further with markets expecting a -0.5% cut in February.
New Zealand's interest rates were unaffected by the increase in US rates. The 2-year interest rates declined by -0.32%, while the 5-year interest rates decreased by -0.22%.
The USD appreciated throughout the month due to concerns about US inflation, higher US interest rates, and general risk aversion by investors. Additionally, weaker economic data and lower interest rates in New Zealand contributed to a -5.4% depreciation of the NZD.
Markets are closely monitoring US policy signals from the incoming Trump administration, especially regarding tariffs and their impacts. Locally, the key data point will be January's CPI inflation.