As was universally expected the RBNZ left interest rates unchanged this week but offered up a stern rebuke for anyone expecting early cuts.

October saw weak equity and bond performance as yields kept rising. However, November has begun with much better dynamics as US corporate earnings reports and a dip in bond yields brought some relief for investors.

New Zealand's September quarter inflation data came in much better than expected this week.  However, a closer look at the details underlines the stickiness of domestic inflation pressures and the challenge of returning inflation to 2% sustainably

Global bond yields are continuing to head higher.  Hawkish central banks reinforcing the theme of higher for longer, rising debt and bond issuance, and yet another US debt ceiling debate are all contributing to the weakness.

New Zealand’s June quarter current account balance and GDP growth rate both came in better than expected this week.  However, there are headwinds ahead – for both.

World equities still lack a catalyst for additional gains, and slipped in August as global bond yields once again rose. Government deficits are unnerving traditional bond investors, though the yield levels are increasingly compelling. Energy prices rose, and cost pressures on firms and consumers remain high.

We expect this weeks Monetary Policy Statement from the RBNZ to be a largely uneventful affair.  Sure, not everything has gone the RBNZ’s way since the May MPS, but we think they will be quietly confident that higher interest rates are doing the job.  We expect they will signal general satisfaction with the current level of interest rates, but also not to expect interest rate cuts until the second half of next year.

We think it’s still too early for this week’s June quarter New Zealand labour market data to show any significant softening.  But we still think that’s coming.  Pent-up demand for labour will soon run its course and start colliding with weaker demand.  So, we remain of the view the RBNZ has tightened enough, but that it will be a long time before we see interest rate cuts.

June month and the quarter's global equity returns were strong, while bond returns were flat to down. Market sentiment will be tested in July by the US earnings season and impending central bank meetings, at which interest rates will likely rise.

In June, approaching 2023's mid-point, the long bear markets in equities and bonds dating from January last year have finally ceased. Global equities have gained this month and major markets have now returned 15% or above in 2023. In contrast, NZ has lagged and conditions domestically remain comparatively soft.

May US labour market data showed stronger than expected payrolls growth, but also a higher unemployment rate.  That degree of ambiguity suggests that while we believe the Fed will pause in June, July remains live for a further tightening.

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Budget 2023 added a bigger demand impulse into the economy than we were expecting.  That could shift the dial on the RBNZ’s OCR deliberations.  In a stretched economy, what fiscal policy giveth, monetary policy may have to taketh away.  We only have to wait till next week to see how the RBNZ responds.

It’s a busy week for central banks with the RBA, the Fed and the ECB all meeting this week.  The RBA is expected to remain on hold while the Fed and the ECB are both expected to hike.  Important labour market data is also scheduled for release in the US and here in NZ.  We expect slightly stronger employment growth in the March quarter when compared with December, but it’s important to note this is likely the result of improving supply conditions in the labour market, rather than a sign of accelerating labour demand.

It’s the turn of the antipodean central banks with both the RBA and the RBNZ meeting this week. Markets are expecting a pause in the RBA hiking cycle on Tuesday, though this might not necessarily mean the bank is finished. With more work to do, we wouldn’t be surprised if the RBA just got on with the job and hiked another 25bps. The RBNZ is expected to lift the OCR a further 25bp to 5.0% in its Monetary Policy Review on Wednesday and signal that inflation remains uncomfortably high and that there is more work to do.

At risk of appearing overly sanguine, we don’t see issues that emerged in a number of financial institutions this week as being systemic.  That said, we have recently argued that while monetary policy may tighten a bit further, central banks shouldn’t dismiss the long lags between monetary policy actions and those actions impacting on the real economy.  This week’s events are a helpful reminder that those lags also apply to the financial sector.  The full implications of over a decade of super-stimulatory monetary followed by an aggressive tightening path will take time to be fully realised and will ultimately expose businesses with poor balance sheets.

New Zealand retail sales volumes fell in the final quarter of last year and are expected to trend lower over the course of this year, reflecting tighter monetary conditions and households on fixed rate mortgages rolling into, in many cases, significantly higher mortgage rates.  In Japan, the nominee for Governor of the Bank of Japan was cautious on the outlook for inflation in Japan, but current higher inflation offers a window of opportunity to exit unconventional policy settings.

As the year continues with bond yields at higher levels and positive returns from equities, we introduce asset allocation changes in our Diversified Funds’ positioning for the year ahead.

Markets have begun 2023 on a positive note, as investors weigh up how much longer high inflation will last and whether tight monetary policy from central banks will endure quite as long as feared.

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November showed investors in a cautious but stoical mood, in the context of a difficult year. Bond yields moved down, in anticipation of a 2023 slowdown and global equities rallied. New Zealand equities were well outpaced by Australian and World shares, as the hawkish NZ Reserve Bank signalled even higher interest rates ahead.

New Zealand is already knock knock knocking on recession’s door.  Will the OCR really need to go to 5.5%?

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Latest US inflation data was met by markets with alacrity, but its important not to get ahead of ourselves.  Keep the seatbelt buckled – we’re only part way through the journey.

As we get closer to the peak in the monetary policy cycle, it’s not immediately obvious what central banks will do next.  Policy setting inevitably becomes more nuanced as there are more things to consider and greater judgement is required.  The first phase is to reduce the pace of tightening and we are already starting to see evidence of that in the US, Canada and the Eurozone.  New Zealand, however, is widely expected to be the exception that proves the rule.

September showed mounting signs that defensiveness and caution are warranted as Central Bankers made it clear to investors that inflation levels still justify higher interest rates for longer.

In the UK, “Trussonomics” is off to a less than auspicious start.

This week's US CPI data shows the battle against inflation will not be easily won and seems to us to cement in a third consecutive 75bp increase in the Fed funds rate when the FOMC meets next week.

In his comments at the just concluded annual Jackson Hole Monetary Policy Symposium, US Federal Reserve Chair Jay Powell put any lingering expectations of an imminent policy pivot well and truly to bed.

US inflation data due this week is expected to show a decline in the annual headline rate.   But getting headline inflation under control is only one part of the task for central banks.  The annual rate of core inflation is expected to have risen in July and prove more stubborn to get under control as the labour market remains tight and wage growth remains strong.  Recent suggestions of a policy pivot by the Federal Reserve are premature, but it’s the labour market that will provide the clues to when that’s more appropriate.

Bevan Graham discusses the next big inflation debate and nails Salt’s colours to the mast.

Latest data will have the RBNZ quietly confident that things are heading in the right direction in their battle to return inflation to target as they head into their final MPS of the year at the end of this month.

Expect a “hawkish hold” from the US Federal Reserve this week followed by a resumption of tightening from the Reserve Bank of Australia next Tuesday.  Here in New Zealand, third quarter labour market data is expected to confirm our view the RBNZ has done enough tightening and now just needs to be patient.

A renewed move higher in global bond yields in September led to negative returns from fixed income and equity assets around the world. Active bond portfolio management could offset some sources of weakness, but government bond securities fell due to persistent fiscal and inflation concerns. In equities, US, NZ and Australian stocks all lost ground last month.

Global bond yields are continuing to head higher.  Hawkish central banks reinforcing the theme of higher for longer, rising debt and bond issuance, and yet another US debt ceiling debate are all contributing to the weakness.

This week’s PREFU showed a marked deterioration in the Crown accounts which has highlighted just how tight the fiscal situation is.  As we head into the election on October 14th, policy commitments are going to be all about trade-offs.

As central banks start to signal their next moves will be “data dependent”, markets will be watching each data point with extra scrutiny. This week the key data points, both offshore and here at home, were weaker than expected. So, what does this mean for monetary policy?

Market sentiment remained positive in July as developed market headline inflation rates continued to retreat, and activity data, to prove resilient. Global stocks performed well over the month, particularly in the US and Emerging Markets. Fixed income also recorded moderate positive returns in July, although a credit rating downgrade for the USA from Fitch Ratings pushed US 10 year yields up to a 2023 high. Corporate bonds outperformed Sovereigns.

Latest CPI data from around the world shows headline inflation rates all retreating to varying degrees.  The reality is, however, the bulk of the disinflation to date is narrowly based with core inflation rates proving harder to budge.  The path to sustained 2% inflation will be a marathon, not a sprint.  The critical question now is whether central banks have done enough to achieve their mandates.

The midpoint of the year gives us an opportunity to both reflect on the first half of the year and postulate what the second half might bring. Two words are sufficient to summarise the first six months of 2023: resilience and persistence. But as we enter the second half of 2023, we believe the global economy may be approaching an important turning point.

While a contraction in March quarter GDP confirmed New Zealand is in a technical recession, it’s important to note there’s a lot of noise in the data.  Furthermore, whether we are in a recession or not is a secondary consideration to whether the RBNZ has done enough to return inflation to target.

The RBNZ hiked 25bp this week but also called time on the rate hiking cycle. We’re ok with that - as you will recall from our preview, we think the Bank had already done enough.  But its important to emphasise this is just a pause.  Further hikes can’t be ruled out if the data warrants it.  But for now, we turn our attention to the length of time rates will stay elevated.

Monetary policy is entering an interesting phase as central banks around the world start to pause their aggressive rate hiking cycles.  In the US, while the regional banking crisis can’t be ignored, we think it’s the labour market that ultimately matters most.  That means we don’t see interest rate cuts this year.

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Headline inflation in NZ cooled a little in the March result. Central banks are still expected to wind up tightening interest rates in coming months. Equity investors appear willing to be patient until profits improve later this year.

This morning's FOMC rate decisions were in line with expectations. But counter to Chair Powell’s hint of a higher projected terminal rate in the SEP at his recent Senate testimony, the median dot stayed at 5.1%. That suggests recent finance sector issues have had some impact on FOMC participants, however, the median dot for 2024 was higher than projected in December. That dot profile supports our expectation of a bit more tightening still to come, but the real question now being how long rates stay at that peak.

All eyes are on US February payrolls report and Fed Chair Powell’s testimony this week, till-strong global labour markets, despite central banks’ strenuous campaign of interest rate rises, are keeping inflation pressure in the system. This means bond yields are still elevated, though carefully-selected bonds are much better value than last year.

A different tone in global markets this week amid the realisation that central banks aren’t there yet in terms of tightening and that interest rates are likely to stay high for longer than expected.  In New Zealand, the RBNZ remained resolute in its fight against inflation in the aftermath of the devastating floods wrought by Cyclone Gabrielle, however it will be some time before the full impact is clear.  Our thoughts go out to all those affected.

This week’s softer than expected NZ labour market data adds to recently softer activity data and lower than expected inflation in suggesting tighter monetary conditions are starting to bite.  We think the RBNZ still has more work to do, though not as much as they signalled in their most recent Monetary Policy Statement.

There has been a positive tone in markets since the start of the year.  This has been built on an expectation that inflation, particularly in the US, might be able to be brought under control with a “soft landing” for the economy.  But Bevan Graham argues we are not out of the inflation woods just yet.

The US Federal Reserve, the European Central Bank and the Bank of England all have their final meetings of 2022 this week.  All are expected to hike by 50bp, slower than their recent 75bp moves.  Markets will be poring over the detail, looking for any hints of what comes next.  We believe all three will reach their terminal rates in the first quarter of next year, but don’t expect rate cuts until 2024.  That gives us plenty of time to talk about that next year.  In the meantime, have a great Christmas and a happy New Year.

The RBNZ meets this week and will provide updated forecasts with a peak OCR likely to be closer to 5% than the 4.1% projected in August. In terms of the interest rate move, it’s a question of what the bank should do and what they will do. We think they should hike 50bps and schedule an extra meeting in January. What they probably will do is hike 75bps and say see ya in February.

Investors turned cautiously more willing to build up positions in October as many assets have had price falls to more compelling valuation levels. Overall, the safer sectors are leading returns as bond yields remain high and the economic outlook does not support interest rate sensitive stocks as yet.

Today’s New Zealand CPI data was nothing short of awful.  It confirms the RBNZ has work to do and that the battle against inflation will not be easily won.  Higher than expected inflation is now added to stronger than expected activity data and the weaker exchange rate as the RBNZ heads into the November MPS.  That suggests when we see that next set of RBNZ OCR projections, the peak will be lifted from 4.1% to around 5%.

We and everyone else see’s a 50bp hike in the OCR this week as a slam dunk.  As well as another 50bp hike in November, we recently added in a further 50bp hike into our forecasts for a terminal rate of 4.5% by February.  But we are getting closer to the peak in the cycle and the point at which the RBNZs next move is not such a slam dunk.

This week's FOMC meeting confirmed the battle against inflation will not be easily won.  The committee hiked 75bp as expected but flagged a significantly higher terminal Fed funds rate, in fact higher than the terminal OCR rate projected in the latest RBNZ Monetary Policy Statement.  That brings the NZD more firmly into the RBNZs future deliberations.  The NZD has already weakened considerably and is adding to inflation pressures.  The prospect of further weakness has resulted in us pencilling in a further 50bp hike in the OCR in February, in addition to the 50bp increases we expect in October and November, for a terminal rate of 4.5%.

The optimistic market moves of July were partially reversed in August, as Central Bankers made it clear to investors that inflation levels justify higher interest rates for longer. Bond yields moved up, and global equities slipped, though Australasian shares showed resilience with around 1% overall market gains for the month.

The RBNZ is intending to take no prisoners in its war on inflation.  We consequently revise up our expected OCR peak to 4% by November this year.  Further out our relatively weaker growth outlook, particularly through the middle part of next year, has us expecting rate cuts a tad earlier than the Bank.

Greg Fleming discusses the factors driving a sharp equity market rally in July, accompanied by positive moves in bonds, as monetary conditions tighten but investors now consider the central bank hiking cycle may prove to be more limited than previously feared.

Bevan Graham discusses the next big inflation debate and nails Salt’s colours to the mast.