The Month Ahead

Global share markets were higher in November, buoyed by Donald Trump’s US election victory. His election promises included tax cuts and deregulation, which are largely seen as good for businesses. Key share market indices in the US hit all-time highs, continuing their great run this year, while markets down under were also on track to finish the month with solid gains.

The S&P 500 Index and Nasdaq 100 Index were up by more than 5%, while the Dow Jones Industrial Average – which comprises 30 of the largest companies in the US – gained over 7%. In fact, the S&P 500 and the Dow Jones Industrial Average both hit all-time highs and posted their best months of 2024. In New Zealand, the NZX 50 Index was up more than 3%, and traded at its highest level in more than two-and-a-half years.

It was a more volatile month for bond markets given that Trump’s economic policies could be inflationary, prompting investors to worry the US Federal Reserve (the Fed) may slow its pace of interest rate cuts. New Zealand bonds were also mixed, even after the Reserve Bank of New Zealand (RBNZ) delivered a further 50 basis point cut in the Official Cash Rate (OCR).

As we head into the end of the year, all eyes will be on the Fed, whether it continues to lower interest rates, while economic data in New Zealand will set the tone for monetary policy in 2025. Elsewhere, policy rhetoric from President-elect Trump will also have implications for both share markets and bonds.

November saw the RBNZ deliver a 50 basis point interest rate cut for a second meeting in a row, taking the OCR down to 4.25%, from 4.75%. The move was in line with expectations, given inflation has fallen to within the central bank’s 1-3% target band.

In its statement, the RBNZ said “The Committee agreed that a 50 basis point cut is consistent with their mandate of maintaining low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates and the exchange rate”, while it went on to acknowledge that “if economic conditions continue to evolve as projected, the Committee expects to be able to lower the OCR further early next year.”

Most investors also focused on the forecasts contained in its accompanying Monetary Policy Statement (MPS) – which sets out the central bank’s expectations for the future path of growth, inflation and interest rates. In it, it signalled a slower pace of easing ahead, with inflation projected to increase. That said, in his press conference, Adrian Orr, the Governor of the RBNZ, continues to champion the idea of a further 50 basis point cut at its next meeting.

The RBNZ’s decision was the last one for 2024, with the next meeting scheduled for February 2025. All eyes will now turn to the Fed, which meets on 18 December.

As of 27 November, interest rate markets are pricing in about a 66% chance of a 25 basis point cut to the fed funds rate. The likelihood of a rate cut has been falling over the past month or so as economic data shows the US economy continues to hold up relatively well, while the inflation rate appears to have stabilised above the central bank’s target. Moreover, there are concerns several of President-elect Trump’s economic policies will be inflationary, namely tariffs and tax cuts.

December sees several other central banks meeting as well. Across the Tasman, the Reserve Bank of Australia (RBA) is expected to leave interest rates unchanged. However, minutes from its November meeting suggest the central bank is close to abandoning its tightening bias, opening the door to rate cuts early in 2025. Meanwhile, in Europe, the European Central Bank (ECB) is likely to cut interest rates by a further 25 basis points when it meets, but in the UK a recent uptick in inflation is likely to see the Bank of England (BoE) leave its key interest rate unchanged.

The final key economic indicator for 2024 in New Zealand is third quarter economic growth data. In its recent MPS, the RBNZ has forecast a 0.2% contraction in GDP (Gross Domestic Product) for the quarter. Were this to be the case, the economy would have delivered two back-to-back quarters of negative growth (having contracted 0.2% in the second quarter) and would mean it entered a recession, again. That said, while the central bank acknowledges the weak state of the economy, it believes economic growth will recover during 2025, as lower interest rates encourage investment and other spending.

While the clear outcome from the US election has eased some pre-election market volatility, significant uncertainty remains regarding the scope and details of economic policies proposed by President-elect Trump. We are neutral to international equities and international and New Zealand bonds. In the US, we foresee upside risks to inflation and believe that current 10-year bond yields reflect fair pricing for these increased expectations. We anticipate that markets will remain noisy, until more details emerge once Trump takes office.