Market Update
In September, the soft-landing narrative grew stronger. Central banks' easing measures and increased risk appetite boosted global equity markets, with China at the forefront. In the US, the S&P 500 ended the month with a +2.0% increase. Bond prices also rose as interest rates declined, with the yield on the US 10-year treasury bond dropping by -0.12% to 3.78%.
Early in the month, US economic data led to conflicting opinions on the likely scale of the Fed's first rate cut. While some indicators suggested a robust economy, weaker employment figures countered this view. The market was divided on whether the Fed would opt for a 0.25% or 0.50% rate cut. In the end, the much-anticipated first US Fed rate cut came with a larger than expected 0.50% reduction. Confident that inflation is stabilising, the Fed showed it is intent on removing restrictive monetary policy. This "front-loaded" easing was intended to bolster the economy and prevent further job market weakness. Updated Fed forecasts indicate a relatively quick rate cut cycle, bringing the Fed rate down to 3.375% by late 2025.
In Australia, economic indicators continued to show strength, with the labour market adding more jobs than anticipated and the unemployment rate maintaining a relatively low level of 4.2%. CPI inflation saw a further decline, bringing headline inflation down to 2.7%. However, at 3.4%, the Reserve Bank of Australia's (RBA) preferred 'trimmed mean' measure remains significantly above their target range of 1-2%. Hence, as anticipated, the RBA kept rates unchanged. They mentioned that they don't expect inflation to fall within the target range until 2026 and reaffirmed that rates will remain steady this year as they monitor progress. With rates more than 1% lower compared to the US and NZ, they have the flexibility to be patient in reducing them.
Data from New Zealand presented a mixed picture, with confidence surveys improving as consumers and businesses felt more positive about the future following the Reserve Bank of New Zealand’s (RBNZ) decision to lower interest rates. GDP for the second quarter saw a contraction of -0.2%, which was better than the expected -0.4% decline. However, broader business surveys indicated that economic activity was still on a downward trend, with both consumers and businesses facing significant challenges. This pessimistic outlook influenced the interest rate market, which is now anticipating a high probability of a 0.50% rate cut by the RBNZ in both October and November.
Global rate cuts, a weakening NZ economy, and the expectation of larger RBNZ rate cuts this year led to lower domestic term interest rates. The 2-year rate fell by -0.35%, and the 5-year rate declined by -0.18%, resulting in reduced mortgage rates.
The dovish Federal Reserve resulted in a weaker USD, which pushed the NZD up +1.60% on the month.
Markets are closely monitoring new economic data and geopolitical uncertainties. The interest rate markets have already factored in a significant easing cycle, which now requires confirmation. Currently, the balance between the pace of rate reductions and the decelerating economy seems to be positive for risk and equity markets.