Global markets continued to rise in November as expectations for central bank tightening were pared back. The US stock market (S&P500) ended the month up 5.4%. This came alongside strong performance from bonds, with 10-year U.S. Treasuries decreasing 44bp to 3.60%.
Early in the month the Fed raised interest rates by 75bp, as widely expected. The Fed noted it is premature to start to think about cutting rates and signalled that interest rates would increase to a higher level than previously communicated, which caused equity markets to fall. However, over the balance of the month, US data and Fed speakers set the tone for a slower pace of tightening going forward as the economy and inflation begins to moderate. Consumer Price Index (CPI) inflation was lower than expected, falling to 7.7% from 8.2% the previous month. After many surprises higher over the course of the year the market was relieved to see inflation fall, which caused a strong bounce in share markets and lowered expectations of future Fed interest rate rises. This was confirmed late in the month in a speech by the Federal Reserve Chair, Jerome Powell. Powell indicated the time for moderating the pace of interest rate increases may come as soon as the December meeting and that the Fed expects inflation to continue to fall. This was another relief for the market. The Fed is expected to raise interest rates by 50bp in December. Globally, inflation remains high, with both the UK and Europe experiencing inflation above 10%. The Bank of England raised rates by 75bp in November. Both the BoE and ECB meet again in December, where further increases are expected, but at the slower pace of 50bp. The Reserve Bank of Australia remains the outlier, having only raised by 25bp in November as they reiterate the lag for monetary policy to impact the economy. This was validated when Australian inflation fell from 7.3% to 6.9%, when the market was expecting an increase to 7.6%.
Protests in China regarding the continued Zero-COVID lockdowns turned attention to the potential easing of restrictions from the Chinese Government. While this is likely to be a bumpy process, including a jump in case numbers, signs of reopening have been taken positively by global markets.
In New Zealand, economic data continued to point toward a deteriorating outlook. However, employment growth remained strong with a jump in workers joining the labour force – perhaps due to higher wages on offer, or perhaps because of the increased pressure on household budgets. Business surveys pointed toward a further slowdown, and finally a drop in pricing intentions, which should moderate inflation going forward.
At their last meeting of the year the RBNZ raised the Official Cash Rate (OCR) by 75bp, which was broadly expected by local economists. The biggest surprise was the RBNZ’s OCR track, where they now forecast the cash rate to peak at 5.5% next year, up from 4.1% in the August forecast. The RBNZ also released updated economic forecasts, projecting inflation to continue higher, up to 7.5%, next year, negative GDP growth (recession) next year, and a sharp increase in the unemployment rate to 5.7% over the next couple of years.
NZ 2-year interest rates ended just 3.5bp lower, while the 5-year rates declined 32bp, as the markets began to move in sympathy with offshore rates and look past the likely peak in the OCR.
The trimming of expectations for Fed rate increases saw the USD fall over the month. With the addition of the RBNZ rate rise, positive risk tone and China reopening hopes, this pushed the NZD 8.3% higher.
Looking forward, the markets have found support with the slowing in central bank tightening in sight, although volatility from geopolitical events and the impact of this year’s interest rate increases on economies around the world will continue.