The Month Ahead
June 2024
In May, global equities were mostly higher, with several share markets reaching new all-time highs, as inflation rates continued to fall in most developed nations. Falling inflation is raising hopes that interest rate cuts are around the corner. Bonds too were trending higher, also benefiting from falling rates of inflation and rate-cut expectations.
As of 24 May, the S&P 500 and Nasdaq 100 were both up more than 5% for the month, while several European markets were also on track to finish the month higher. New Zealand equities were underperforming, and as of 24 May were down for the month, in what looks likely to be back-to-back losing months. Meanwhile, global government bond yields were mostly lower, indicating bond prices have risen.
With inflation cooling, central bank meetings are front-and-centre this June, with some tipped to begin cutting interest rates for the first time since the two-year policy tightening cycle began.
The Month Ahead June 2024 summary
Transcript - The Month Ahead June 2024 summary
[Text on screen: The Month Ahead June 2024]
Voiceover: What is the current state of play in financial markets?
[Text on screen: Ray Jack, Senior Investment Analyst]
Ray: Global equity markets continue to perform well, with many share markets reaching all-time highs in May. Markets have reacted positively to a slowing of inflation across Europe, whilst inflation in the US also appears to be cooling now, after a short-term rebound.
Bonds also have had a good period, also benefiting from signs that inflation is heading back towards target levels in many countries.
Voiceover: The RBNZ met in May – what did they have to say?
Ray: The Reserve Bank of New Zealand lifted their forecast OCR track by 5 basis points to 5.65% with a hiking bias. As in previous meetings, they reiterated their concerns around elevated levels of inflation.
However, economic data of late suggests that as we enter winter there is emerging evidence the economy is slowing quickly. We recently entered a recession, consumer spending is on a rapid decline and the labour market is easing.
Voiceover: How does this compare to other central banks?
Ray: It’s clear that New Zealand is having a much more challenging time bringing inflation down than its global peers. However, the economy is performing far worse than most other developed countries, entering a recession last year on a per-capita basis.
In the US, the Fed remains in wait and see mode, but if we see some further slowing of inflation from current levels, we expect that they may begin to cut rates in a few months.
Meanwhile, the European Central Bank looks primed to cut interest rates this June, with inflation in Europe at 2.4%, down from 10% in 2022. Moreover, economic activity has slowed across the continent, also warranting an easing of monetary policy.
Finally, across the Tasman, the Reserve Bank of Australia has maintained its relatively hawkish bias as inflation remains stubbornly high, while its labour market and economy is in better shape than New Zealand’s.
Voiceover: What does all this mean for our fundamental outlook?
Ray: We have seen a divergence of economic performance over the past year or so with the US economy far outperforming its global peers. However, we are seeing signs that the US economy may be starting to slow. Consumer spending is trending down, and credit card delinquencies are increasing. Furthermore, we have seen an increase in the number of Americans filing for unemployment benefits, and signs that the labour market is starting to cool in certain states.
Therefore, we believe that the Fed will begin to cut interest rates sometime in late 2024 to support the economy. Against this backdrop, we are overweight in bonds, which tend to perform well when economies slow.
[Text on screen: Important information. Information can change, is general, and not advice. In good faith, we’ve used reliable sources to get this information, but we don’t promise it’s accurate, complete, or suits you. To the extent that the law allows, we don’t accept responsibility for loss or damage if you rely on or use this information. Past performance is not indicative of future performance. We don’t guarantee performance, which depends on many things, and could be positive or negative. ANZ Bank New Zealand Limited]
RBNZ left rates unchanged – all eyes now on economic growth figures
Although the Reserve Bank of New Zealand (RBNZ) left rates unchanged, it struck a rather hawkish tone, lifting the neutral rate – the rate they expect the OCR to peak – to 5.65%. This implies a 60% probability of another rate hike.
However, in June, we will find out to what extent higher interest rates continue to have on the economy with the release of GDP data for the first quarter of 2024. After two consecutive quarters of negative growth – a technical recession – any further contraction in the economy could warrant a shift in central bank rhetoric – even with inflation elevated.
The RBNZ, in its economic forecasts, said that it expects the economy grew at 0.2% in the first quarter, while several forecasts are also for a modest increase.
Odds of rate cuts in Europe grow
June is a busy month for central banks, with several of the major central banks scheduled to meet. In Europe, there is growing consensus that some will begin to cut rates in June.
Interest rate markets are all but fully pricing in a 25 basis point cut by the European Central Bank (ECB) as annual inflation across the continent has fallen from above 10% in 2022, to 2.4% in April. Furthermore, the economy has begun to slow as the toll of higher interest rates and the fallout of the war in Ukraine (higher energy prices) has tempered growth – warranting some easing of monetary policy.
Meanwhile, interest rate markets are pricing in about a 7.5% chance the Bank of England (BoE) will cut its key interest rate in June. On the one hand, there has been a marked decline in the rate of inflation, however, recent economic data suggest that wage inflation persists, and the economy has found its footing, growing 0.6% in the first quarter of 2024, after entering a recession in 2023.
Fed to leave rates unchanged, but update of economic projections in focus
While rate cuts are on the cards in Europe this June, the US Federal Reserve (the Fed) is widely expected to leave its key interest rate unchanged. However, the meeting will still garner plenty of attention with the release of the Committee’s Summary of Economic Projections (SEP). This is an important update where Fed officials update the forecasts for certain economic metrics, and where they will be in the coming months and years – the most notable being the fed funds rate, inflation and the unemployment rate.
In March, the SEP showed that Fed officials saw three interest rate cuts by the end of the year. However, with upside surprises to inflation in the first three months of the year, and some tempering of rate-cut expectations by Fed speakers, interest rate markets have shifted to price in about 34 basis points of cuts.
We remain defensively positioned
We have seen a divergence of economic performance over the past 12 to 24 months, with the US economy far outperforming its global peers. However, we are seeing signs that the US economy may be starting to slow. Consumer spending is trending down, and credit card delinquencies are increasing. Furthermore, we have seen an increase in the number of Americans filing for unemployment benefits, signs that the labour market is starting to cool off.
Therefore, we are positioned defensively, holding an overweight position to international bonds. We believe as the US economy starts to cool, the Fed will begin to ease policy rates – a scenario where bonds should outperform.
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This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 24 May 2024, and is subject to change.
This document is for information purposes only and is not to be construed as advice. Although all the information in this document is obtained in good faith from sources believed to be reliable, no representation of warranty, express or implied is made as to its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability for any direct or indirect loss or damage arising from your use of this information.
Past performance is not indicative of future performance. The actual performance any given investor realises will depend on many things, is not guaranteed and may be negative as well as positive.