The Month Ahead

Equity markets were on the back foot in April, as strong economic data and higher-than-expected inflation data pushed back the timeline of interest rate cuts from the US Federal Reserve (the Fed). Markets were also nervous given growing tensions in the Middle East, as Iran and Israel traded missiles with one another.

As at 26 April, the S&P 500 Index is down 2.9% month-to-date, having briefly traded back below the 5,000 level. Technology stocks were some of the biggest losers given a pull-back in this sector, which saw the Nasdaq 100 Index fall 2.9%. Nvidia Corporation, the chip maker that has driven the sector’s recent strength, was down 15% at one point, but has recovered to only 2.9% lower.

European and New Zealand equities also fell, although their losses were muted, with the Euro Stoxx 50 Index down 0.7% and the NZX 50 Index down 2.5%. The FTSE 100 Index in the UK was one of few markets to make gains, hitting a new all-time high during the month.

Against this backdrop, you would have thought that safe-haven bonds would be in favour. However, strong economic data continued to weigh on this market, which contributed to the idea of rate cuts being pushed back to later in the year. The yield on the US 10-year bond is up 46 basis points, to 4.67%.

As seems to have been the case for many months, May will see a focus again on inflation data and central bank rhetoric, with investors also likely to keep a close eye on the geopolitical backdrop.

May is a big month for central bank meetings, with the Fed, Bank of England, Reserve Bank of Australia, Reserve Bank of New Zealand and both Sweden’s and Norway’s rate-setting authorities scheduled to meet. While we’re not expecting changes, what they say – and any revisions to their forecasts – will likely be scrutinised.

In the US, economic data has surprised to the upside. Inflation has been hotter than expected this year, with continued labour market resilience. As a result, Fed speakers and investors alike have pushed out their timings for rate cuts this year, and we question whether the bank’s 2% inflation target can be achieved while growth and wages remain this strong. Meanwhile, European growth and inflation are softer, and New Zealand is also showing signs of weakness.

We expect monetary policy settings to diverge this year, with weaker economies loosening policy and the Fed remaining patient while its economy holds up. At the start of the year, most expected the first US rate cut to come as early as April, but this was pushed back to June, and now September, with some even talking about 2025. European markets are lined up for a first cut in June, with President of the European Central Bank, Christine Lagarde, recently saying “If we don’t have a major shock in developments, we are heading toward a moment where we have to moderate the restrictive monetary policy that we have, in reasonably short order”.

Tensions between Iran and Israel came to the fore in April, following tit-for-tat attacks between the two countries. Calls by the international community for restraint, coupled with media downplaying the events in both countries, does however suggest a reluctance to escalate their simmering tensions.

Surprisingly, the price of oil has been stable and is currently trading at around the same level that it began the month. Despite this, investors are likely to remain nervous, and central banks too are likely to be keeping a close eye on developments, not least because any jump in oil prices could result in sustained inflation, which could delay rate cuts further.

There’s plenty of other political influences impacting markets too. The US election, now only 6 months away, has the potential to create headwinds, while elections in India (the largest in the world) are already underway. These, along with the recent passing of a US$61bn aid package in the US for Ukraine, means that geopolitics looks set to remain a theme in the background.

First quarter earnings season is well underway and will continue into May. As we reach the mid-way point, companies have performed well compared to expectations, especially in the information technology sector. Of the 46% of the S&P 500 companies that have reported actual results, 77% have reported earnings that are above estimates, while 60% have reported revenues above estimates.

As we head into May, investors continue to look to the forward guidance offered by companies to glean any insights as to whether earnings can remain resilient given ‘higher for longer’ interest rates, slower global economic growth, and higher wage costs. 

Our central view is unchanged, in that we expect to see US growth remain positive over the short term, and weaker growth in Europe and New Zealand. Central banks will likely make slow progress in terms of getting inflation back to target levels, holding interest rates in restrictive territory in the meantime. An extended period of tight monetary policy should eventually weigh on growth, enough to tip it into negative territory, and consistent with a mild recession.

Given this we remain defensively positioned at a tactical level, reflected in our underweight to international equities, and an overweight to New Zealand and international bonds.