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.