March quarter New Zealand inflation data still has us expecting a first interest rate cut from the RBNZ in November.

Global Equities delivered very strong gains in the First Quarter, with US shares rallying by 10% and Japan’s by more than 20%, in local currency terms.

The US rally broadened beyond Technology. March Quarter’s fall in the NZD against key currencies boosted returns for unhedged investors.

However, the move up in global bond yields is still triggering volatility.

The US Federal Reserve and the Bank of Japan both meet next week.  Key question at the Fed is whether the “dots” still show a median three cuts this year or whether it’s pulled back to two.  Meanwhile, at the Bank of Japan, are YCC and NIRP finally gone?

Investment markets have mostly retained their upward direction, as corporate earnings in the US print better than expected. Interest rates have ticked up, with more realism on the pace of rate cuts, constraining bond and real asset performance.

It’s been something of a rocky start for markets in 2024 as bullish monetary policy expectations have been wound back, particularly in the US.  Here in New Zealand, recently weaker-than-expected GDP data has been something of a game-changer, but only up to a point.  While in our view it negates the need for further interest rate hikes, it does not of itself bring forward interest rate cuts.  That requires weaker activity to be followed up by weaker-than-expected inflation, particularly in the non-tradeable component.  Next week's CPI data will be illuminating.

​It might be nearly Christmas but there’s no scope to relax just yet.  There’s a lot of news to digest before thoughts can turn to the Christmas pavlova.

Markets rallied strongly in November as the inflation and central bank policy outlook improved. Particular beneficiaries of the sharp drop in bond yields were equities and notably, Global Real Estate securities.

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.

Recent data appears to rule out a June interest rate cut in the US, and with September complicated by its proximity to the election, any hopes for a cut in 2024 appear to increasingly rest on the December FOMC meeting.

NZ GDP showed the expected mild contraction in activity in the December quarter of last year showing that restrictive monetary policy is continuing to constrain demand, even in the face of strong population growth.  And while our current account deficit improved over the same period, it continues to leave us vulnerable to shocks.

The returns from International assets continue to outstrip those from New Zealand investments, with weak domestic trading conditions sapping local results. Global equity asset classes, and selected global bonds, enjoyed February gains.

There were no surprises from the US Federal Reserve this week.  They dropped the reference to the risk of higher rates and adopted a neutral bias, pushing back on rate cuts expected by the market as early as March.  And in a speech also this week the RBNZ’s Chief Economist pushed back on early rate cuts in NZ.

Yesterday’s HYEFU and mini-Budget showed a further deterioration in the Crown accounts and that’s before last week’s weak GDP report is incorporated into the numbers.  The fiscal situation is getting tighter by the day and the new government is in for a few lean fiscal years.  That will make trade-offs and re-prioritisations a key element of their fiscal strategy.  From all the team at Salt, have a great Xmas and New Year.

Markets rallied strongly in November as the inflation and central bank policy outlook improved. Particular beneficiaries of the sharp drop in bond yields were equities and notably, Global Real Estate securities.

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.