The Month Ahead

US equity markets moved to all-time highs in September, helped in part by a 50 basis point cut by the Federal Reserve (the Fed), which provided some much-needed relief for borrowers. Meanwhile, ongoing signs that growth is holding up is raising the likelihood that the economy is headed for a soft landing.

As of 23 September, the S&P 500 and Dow Jones Industrial Average were at all-time highs, and both were on track to record their fifth straight month of gains. Meanwhile, European markets were not faring as well, with most indices lower on the month.

Closer to home, the NZX 50 had retreated from a two-and-a-half-year high and was trading around flat on the month, while it was better news in Australia, with the ASX 200 trading to a new record-high. 

In fixed interest markets, bond prices were higher across the board, pushing yields lower, as most developed central banks around the world had either begun, or were signaling, they were ready to cut interest rates as inflation continued to trend back towards target rates.

With several central bank meetings, including here in New Zealand and the US election on the home straight, there is plenty to keep an eye on this October. For a look at the key themes, here’s The Month Ahead for October.

In September, the Fed kicked off its interest rate cutting cycle by reducing the fed funds rate by 50 basis points. It was the first cut since the pandemic, and outside the pandemic cut, it was the first 50 basis point cut since the financial crisis in 2008. In summary, the Fed said they had gained greater confidence that inflation was on the right path, and now were paying closer attention to the labour market as the unemployment rate has risen from 3.5% to 4.2% in August over the past 12 months. 

With the Fed meeting over, all eyes turn to the Reserve Bank of New Zealand (RBNZ) meeting on 9 October. It is expected the RBNZ will cut interest rates for a second time in about 10 weeks, as the domestic economy falters, and inflation continues to fall back towards the central bank’s 2% target rate. As of 23 September, the market is pricing in about a 50% chance of a 50 basis point cut, which would take the Official Cash Rate (OCR) back to 4.75%.

The case for a 50 basis point cut comes down to how fast the RBNZ believes the economy is decelerating – especially when it comes to the labour market. If they are comfortable that the labour market is easing, but not at a rapid pace, then we could see the RBNZ continue with a more measured 25 basis point cut like it did in August. 

Elsewhere, the Bank of Canada (BoC) is expected to cut interest rates on 23 October, while the European Central Bank (ECB) will weigh an interest rate cut on 17 October, but interest rate markets suggest it is less likely to cut.

It’s down to the final stretch for the US election on 5 November, and after a second assassination attempt on former President Donald Trump, it appears the final weeks will be anything but a non-event. Trump and Harris continue to make their push in the key swing states across the Mid-West and the Sun Belt.

After a strong debate performance, Vice President Kamala Harris has edged ahead in most national polls. She has – to date – successfully wound back many of the unpopular policies she ran on in the 2019 Democratic Primary, and by shifting to the centre, Harris has turned around what was looking like a bleak outcome for the Democrats before she rose to the top of the ticket. Meanwhile, the Trump campaign has shown some cracks of late, with his attacks on immigrant communities not sitting well with Americans.

The shift in fortunes between the two parties showed in a 15-17 September YouGov/The Economist poll, which had Harris leading national polls by four points. Furthermore, Harris appears to be improving in the all-important Mid-West swing states of Michigan, Wisconsin and Pennsylvania.

It is uncertain whether the two candidates will debate again, with Harris accepting a CNN debate on 23 October, but Trump has said the debate is too close to the election and subsequently has so far declined the debate.

In late September, we brought our overweight position to international fixed interest back to neutral. Global bonds have had a strong period, and this position have proved beneficial to fund performance, but given the extent of the move we feel the risk – especially in the short term – is now skewed towards a pullback in bonds (a move higher in yields). Therefore, we felt the prudent move was to square off our overweight position.