Market Update
Global markets continued to rally in March. Equity markets saw healthy gains, with the S&P500 index up +3.1% in USD terms, while US bond yields moved slightly lower, with the US 10-year rate moving down -0.05% to 4.20%.
Global markets are growing more optimistic of a “soft landing” as US economic resilience continues. US inflation was slightly higher than expected, prompting interest rate markets to taper expectations for interest rate cuts this year.
The Federal Reserve held their benchmark rate unchanged, and in a dovish surprise continued to signal 0.75% of cuts this year. They raised their projection for the rate at the end of 2025, indicating that higher rates may be needed for longer to tame inflation. The Fed repeated their message that they are looking for more evidence before they decide to cut. Interest rate markets retraced earlier moves higher on the slightly more dovish outlook, with the first cut now expected by July this year. Equities benefited from the prospect of eventual interest rate cuts.
Australia continued to show robust job growth, with the jobless rate surprisingly dropping to 3.7% from 4.1%. Despite the risk of higher wages from the tight labour market, CPI inflation stayed steady at 3.4%, which would have been welcome news for the Reserve Bank of Australia (RBA). The RBA are still waiting for more data before changing their policy, with interest rate markets predicting the first reduction by September this year.
New Zealand has re-entered a recession, as GDP in the 4th Quarter of 2023 fell by -0.1%, after a drop of -0.3% in the previous quarter. This was below forecasts and highlights the ongoing slowdown of the NZ economy. The situation is even worse when we consider the very high population growth driven by net-migration, with GDP per capita down -3.1% over the year. The market now believes that the Reserve Bank of New Zealand (RBNZ) has stopped raising rates, with expectations for the first cut in August this year.
The weak GDP data and late month move lower in global interest rates pushed NZ rates lower. The 2-year rate ended the month down 20 basis points and the 5-year rate was down 18 basis points.
The disappointing NZ data and move lower in NZ interest rates drove the NZD down -1.9%.
Incoming data is still the main focus of global markets as they try to assess if central banks will have room to lower rates this year. After the solid gains in stocks so far, investors are getting more wary of any signs of higher for longer interest rates and an increase in geopolitical risks.