The Month Ahead

Two of the major equity market indices in the US moved to all-time highs in June, helped by strong gains in the share prices of Apple Inc and Nvidia Corporation, and weaker-than-expected US inflation data. In fact, AI darling, Nvidia Corporation, overtook first Apple Inc then Microsoft Corporation to briefly become the largest company in the world by market capitalisation.

European equities lagged their US counterparts, despite the European Central Bank (ECB) delivering its first rate cut. The region’s markets traded lower following a slump in France’s equity market, on news President Emmanuel Macron had called a snap election following a surge for his far-right rivals in the European Parliament elections.

As of 25 June, and with three trading days left in this month, the S&P 500 Index and the Nasdaq 100 Index are up 3.7% and 5.9% respectively, while the Euro Stoxx 50 Index is down 0.9%. New Zealand equities also underperformed, with the NZX 50 Index down 1.3%, despite first quarter growth data showing the economy crept out of recession.

Global government bond markets were mostly higher, as inflation readings continued to show central banks winning in their fight against pricing pressures – albeit slowly. While interest rate cuts were not forthcoming in the US, bonds took comfort from an easing in monetary policy in other regions.

As we head into July, central bank policy remains front-and-centre, with the political landscape in Europe increasingly likely to sway investor sentiment.

In June, French President, Emanuel Macron, called a snap election, despite having three more years left in his term. It follows a big victory for his rival, Marine Le Pen’s National Rally, in a European Parliament vote. While the outcome of that vote has little bearing on national politics, Macron believes continuing his current mandate without a new consultation with the French people would likely put greater strain on the political system – especially given he already lacks a clear majority in the French parliament. Voting will take place at elections on 30 June and 7 July and is likely to keep investors on edge.

Across the channel, UK politicians are out and about drumming up support for their parties ahead of their election on 4 July. Rishi Sunak’s call for an early vote came as a surprise to many. His Conservative Party have been falling consistently in the polls and, as things stand, the Labour Party is likely to win with a sizeable parliamentary majority. It’s believed Sunak opted for an election sooner as this may provide his party with the best opportunity to turn the tide on the voting, given the UK economy continues to slow and is likely to fall on harder times from here.

In June we saw the Bank of Canada and the ECB both deliver rate cuts for the first time, joining the likes of the Swiss and Swedish central banks in already having lowered interest rates. Meanwhile, the US Federal Reserve (the Fed), Reserve Bank of Australia (RBA), Reserve Bank of New Zealand (RBNZ) and the Bank of England (BoE) all held firm. This marks the start of central bank policy divergence, which may continue for a bit.

Although the Fed – arguably one of the more important central banks – left rates unchanged, it noted that progress had been made on taming inflation. This was evidenced in May’s CPI data, which was weaker than expected, with consumer prices unchanged over the month and the annual rate down to 3.3% – edging closer to its 2% target level. 

The US economy appears to be trucking along at a reasonable pace; demand for services and the labour market both remain strong. We do not expect imminent cuts from the Fed, with financial markets now pricing in the first rate cut for November this year.

While growth in the first quarter was slightly positive (as measured by recent GDP data), it confirmed what many believe; that the New Zealand economy is flatlining. The 0.2% reading for the quarter means the economy has been lifted out of ‘technical’ recession territory, but the pace of growth is far from astounding – five out of the last six quarterly readings have been negative. 

Unfortunately, relief by way of interest rate cuts may not be forthcoming. Inflation in New Zealand remains stubbornly high, especially non-tradeable inflation. In July we’ll see the latest readings for the second quarter. First quarter inflation ran at an annual pace of 4.0%, with non-tradeable inflation of 5.8%. Even if the second quarter readings fall, it’s unlikely the RBNZ will cut interest rates anytime soon, given that inflation here is running at a higher rate than in overseas markets.

We maintain an underweight position to international equities and overweight positions to both international and New Zealand fixed interest. This reflects our view that economic growth is expected to slow in many economies, and this will be more supportive of defensive assets, such as bonds.

Central banks are winning in their fight against inflation and we’re seeing inflation trend back towards target rates. While US interest rates will remain on hold for the time being, we expect central banks outside of the US to continue to lower interest rates, and this ultimately will be positive for the asset class.