Market Update
Global markets resumed their upward trend in May, boosted by optimism about easing inflation and a resilient economy. Stock markets rose, with the S&P500 index increasing +4.8% in USD terms and the Nasdaq, which has more technology stocks, rising +6.3%. Bonds also advanced as interest rates dropped, with the US 10-year rate declining -0.18% to 4.50%.
As anticipated, the US Federal Reserve (Fed) did not alter the Fed Funds Rate. The Fed is still concerned about getting inflation back to 2% but believes that the next change in rates will be lower.
US data was encouraging for taming inflation. Job growth was a bit weaker than forecast with slower wage rises. Inflation measures kept easing, and economic activity signs all showed a cooling economy, which will hopefully result in further disinflation. Interest rate markets anticipate the Fed to start reducing rates by November.
The Reserve Bank of Australia (RBA) kept rates steady and repeated their neutral position. Australian economic data has revealed some worrisome signs of stagflation, with employment, consumer and construction activity weakening more than anticipated while CPI inflation unexpectedly rose. Markets do not anticipate the RBA to have room to cut rates this year.
New Zealand's economic indicators keep worsening. Unemployment increased more than forecast, business and consumer confidence declined further, and construction activity dropped. The positive news is that inflation expectations also eased.
As anticipated, the Reserve Bank of New Zealand (RBNZ) kept rates steady, but they signalled a more hawkish stance, pointing out the dangers of domestic non-tradable inflation being more persistent than expected. They repeated that they do not foresee reducing the OCR until the latter half of 2025.
NZ rates fell along with global interest rates, but the RBNZ's less dovish stance kept shorter-term rates from dropping materially. 2-year interest rates decreased by -0.04% and 5-year by -0.10%.
The NZD had a very strong month, boosted by the cooling US economic data, positive risk sentiment and the RBNZ's more hawkish outlook. It rose +4.3% against the USD and +1.5% against the AUD.
Some important economic events coming up in June are the US CPI print, the Fed meeting and the NZ GDP release. Investors will be looking at the data for clues on the timing for when central banks can start cutting interest rates.