The Month Ahead

In March, equity markets continued their good start to the year, with key US indices hitting new record highs, while in Europe, equities also trended higher. New Zealand equites were also up, despite news the economy entered a recession in the final quarter of 2023. As of 22 March, the S&P 500 was up more than 2.5%, the Euro Stoxx 50 up more than 3% and the NZX 50 was 2% higher.

After their sell-off in February, bond markets clawed back some gains in March, especially in New Zealand, with some weakening of economic data suggesting the likelihood of further rate hikes from the Reserve Bank of New Zealand (RBNZ) is fading.

Looking forward, there’s no doubt central banks remain front-and-centre as investors look for direction on the path of interest rate policy – especially now, as many have signalled their next move is likely to be a cut.

Most of the world’s major central banks remain on hold as they await further confirmation that the interest rate hikes over the past two years have slowed inflation, cooled economic activity, and loosened labour markets, which were a significant contributor to rising inflation during 2022 and 2023.

Of the major central banks, the US Federal Reserve (the Fed), the European Central Bank (ECB) and the Bank of Canada (BoC) could begin cutting interest rates as soon as June, according to interest rate market pricing. Confirmation of potential June interest rate cuts will be in key economic data released in April, including employment figures and inflation data.

Bucking the trend was the Swiss National Bank (SNB), which cut interest rates, saying it was comfortable with where inflation was headed and added that the cut should help boost economic activity.

Inflation remains the bellwether for global financial markets as central bankers wait for confirmation that inflation is headed back to their target levels.

Several economies in Europe have seen marked declines in inflation, including some big downside surprises, where the economic data came in much lower than expected. In the UK, annual inflation fell to 3.4% in February, a big decline from the 4% recorded in January, giving hope that the Bank of England (BoE) could cut interest rates and provide some much-needed relief for borrowers.

Meanwhile, inflation figures in Europe delivered a mixed bag for policymakers there. While eurozone’s headline figure fell to 2.6% in February, down from 2.8% the prior month, both it and the core figure were higher than expected.

It's been a little different in the US, where annual inflation – after falling to about 3% in the middle of 2023 – has remained stubbornly high around the 3-3.5% level, largely driven by rising shelter costs.

Economic news out of New Zealand has been downbeat of late with recent growth data showing the economy contracted by 0.1% in the final quarter of 2023, meaning it entered a technical recession, while retail sales have fallen for eight consecutive quarters, a clear sign that consumers are clamping down on spending.

However, weaker demand across the board is yet to dent inflation, which remains above 5% – one of the highest rates in the developed world. This is creating a conundrum for the RBNZ, who would be reticent to hike interest rates into a slowing economy.

On 10 April, we will see just how the central bank plans to navigate this tricky situation when it meets once again. In terms of an interest rate decision, it’s widely expected to leave the Official Cash Rate (OCR) unchanged at 5.5%, but investors will be looking for clues in the guidance from the central bank.

Adding to a busy April is the release of Q1 inflation data on April 17, which unfortunately (for the central bank at least) comes after its rate-setting meeting. Given the worries about elevated inflation in a slowing economy, policymakers and investors alike will be hoping the rate of inflation continues to move closer to the RBNZ’s 1-3% target rate.

The US economy continues to hold up relatively well compared to most of its global counterparts that are experiencing slowdown as the cumulative effect of higher interest rates are starting to take their toll. This has been felt particularly hard in New Zealand as higher mortgage rates have stifled consumer spending, which put the economy into a recession in the latter stages of 2023.

At a tactical level, we remain defensively positioned, reflected by our overweight position to New Zealand and global bonds, while maintaining a modest underweight to global equities. We believe that the economic cycle is peaking, and growth will trend lower as we move through the coming months. As this unfolds, bonds should outperform, while we could expect equity markets to face some headwinds.