The Month Ahead

Global equity markets were mixed in October, with US markets continuing their good run, but several markets in Europe and Asia were lower. As of 29 October, the S&P 500 and Nasdaq 100 were both up more than 1%, while most European markets were lower. Closer to home, the NZX 50 was up nearly 3%, benefiting from the interest rate cut by the Reserve Bank of New Zealand (RBNZ), while across the Tasman, Australia’s ASX 200 rose to a record high. 

After a good period, bond markets retreated, which meant yields moved higher, reflecting that fact that interest rate markets had priced in a lot of the expected moves by several of the world’s central banks. In the US, the yield on the 10-year government bond rose back above 4.2% to a multi-month high, while in New Zealand, the 10-year equivalent was also higher over the month. 

Looking ahead to November, all eyes will be on the US election, where the results of the White House, Senate and House of Representatives (the House) will dictate policy initiatives, while key economic data in New Zealand will impact the RBNZ’s decision late in the month. 

While focus on the US election is on the outcome of the presidential race, the implication for financial markets lies in the makeup of the two other branches of government – the Senate and the House. 

Historically, financial markets have reacted positively to a divided Congress, where one party does not hold control of both branches as well as the White House. A divided government generally brings with it more stability and assurances that there will not be any drastic changes to policy. If there is a sweep, and one party wins the White House, plus the Senate and the House, some policy initiatives the two parties have campaigned on include:

The Republicans will look to push through further tariffs on imports, while tax cuts for corporates and small business are also likely. It is unsure how these would be funded, therefore there is a risk these policies could be inflationary. 

Meanwhile, a Democratic sweep would likely see the corporate tax rate lifted to 25% (in 2016, the Republicans reduced the corporate tax rate from 35% to 21%), while an increase in the capital gains tax is also possible. In terms of spending, the Democrats have said they will expand child tax credits, work on lowering health care and prescription drug costs and reducing food prices. 

The one area where markets may not react so positively to a divided Congress is when it comes to raising the debt ceiling, which is required to issue further debt to fund the government. In the hyper-partisanship political landscape, both sides have weaponised the debt ceiling to create uncertainty and cast the sitting president and his party in a bad light.   

The RBNZ meets for the last time this year on 27 November, where it is expected they will cut the Official Cash Rate (OCR) for the third time in this rate-cutting cycle. As economic activity continues to slow, and inflation nearing the central bank’s target rate of 2%, interest rate markets are pricing in at least 50 basis points of cuts.

Inflation, as measured by the Consumer Price Index (CPI) fell to an annualised pace of 2.2% in the third quarter, which all-but confirmed a 50 basis point cut, with an outside chance that the central bank may opt for a larger-than-usual 75 basis point cut. The case for a 75 basis point cut would likely grow if unemployment data (released 6 November) for Q3 comes in worse than expected. It is expected that the unemployment rate has risen to about 5%, up from 4.6% in the prior quarter. 

Furthermore, the RBNZ will have to weigh up the fact that its next meeting isn’t until 19 February 2025, which could put them behind the curve should the economy remain sluggish over the Christmas period. 

As of 29 October, interest rate markets were fully pricing in a 50 basis point cut, with a small chance of a 75 basis point cut. 

After bringing our overweight position to international fixed interest back to neutral in late September, we took our New Zealand fixed interest position back to neutral in October. This change in our domestic fixed interest position reflects our belief that markets have fully priced in economic weakness.  

Our base case is that inflation slows as services and shelter inflation eases; growth remains resilient and central banks are confident enough to ease policy to ensure that real rates remain steady rather than rise as inflation falls. As a result, global markets avoid a recession as a longer expansion is priced.