Global stock markets experienced range-bound trading throughout February, generally ending the month lower. The S&P 500 fell by -1.8% in local currency, the NASDAQ index, which has a large focus on technology, decreased by -2.8%, whilst European indices bucked the trend and made gains. The depreciation of the NZD mitigated some of the decline seen in US markets, resulting in an S&P 500 decrease of -0.8% in NZD terms. Bond prices went up as interest rates declined, with the 10-year US Treasury yield falling by -0.33% to 4.20%.
Global markets are responding to news about tariffs and trade policies, with retaliatory tariffs being imposed on the US leading to the potential of a full-blown trade war. Investors are considering the possibility that a global trade conflict could impact US economic growth, potentially leading to additional rate cuts from the Federal Reserve. Interest rate markets now expect another cut by June.
US economic data revealed CPI inflation was slightly above expectations, supporting the Federal Reserve's January decision to keep rates steady as the decline in inflation appeared to be stalling. However, consumer confidence, retail sales and softer jobs data indicated a potential slowdown in consumer activity which portend for further rate cuts.
The Reserve Bank of Australia (RBA) lowered the interest rate by -0.25%, bringing it down to 4.10%. This marks the first reduction since rates were increased to counter post-COVID inflation. The market widely anticipated this move. The RBA expressed confidence in inflation returning to its target but emphasized that future decisions will be data-dependent – the market terming it a “cautious cut”. Consequently, the interest rate market only expects an 80% chance of another rate cut by May this year.
New Zealand's unemployment rate increased to 5.1%, up from 4.8%, as anticipated, due to the continuing impact of restrictive monetary policy on the economy. The Reserve Bank of New Zealand (RBNZ) further reduced interest rates by -0.50%, bringing them down to 3.75%, as widely expected. Additionally, the RBNZ has revised its projections for the cash rate, with further reductions forecast towards approximately 3% by the end of the year. These adjustments have already been reflected in the interest rate markets, prompting retail banks to lower term mortgage rates accordingly.
Despite a decline in US interest rates, NZ term interest rates remained unchanged as they had already factored in a cut and much of the RBNZ's projected monetary easing.
The NZD decreased by -0.6% against the USD over the month, influenced by risk off sentiment, weaker domestic conditions and the RBNZ adjusting its interest rate cut expectations.
Global markets are closely monitoring developments, with geopolitical news concerning tariffs, trade wars, and the situation in Ukraine evolving daily.