Transcript – The Month Ahead October 2024 summary
[Text on screen: The Month Ahead October 2024, Scott Johnson, Assistant Fund Manager]
Scott: Hi, I’m Scott from ANZ Investments. This is The Month Ahead for October.
Voiceover: What is the state of play in financial markets?
Scott: It was a volatile start to September with global share markets retreating after economic data in the US pointed to a possible slowdown in the economy. Manufacturing surveys, which are generally good indicators of the prevailing health of the economy, came in weaker than expected, while employment indicators such as non-farm payrolls, initial and continuing jobless claims showed conflicting pictures of the US economy.
Despite this, US equity markets recovered their early losses, and headed into the all-important Fed meeting at or near where they began the month.
Voiceover: And what happened at the Fed meeting?
Scott: The Fed lowered its key interest rate by 50 basis points, which was somewhat of a surprise, economists were all calling for a 25 basis point cut given the ongoing strength in the US economy but Interest rate traders were betting big on a 50 basis point cut due to the perceived slowdown of employment. For reference, outside of the emergency cuts during the COVID pandemic, this was the first time the Fed had cut rates by more than 25 basis points since the financial crisis in 2008.
The Fed said it had gained greater confidence that inflation is moving sustainably closer to its 2% target rate. It is also hoping to prevent any spike in the unemployment rate, which has risen from 3.5% in July last year to 4.2% just as recently as last month. What was further surprising about the 50 basis point cut was Jerrome Powells post decision press conference where he spoke at length about the strength of the US economy, and the cut was actually a recalibration of rates rather than due to underlying weakness. This resulted in longer term interest rates, think 10 to 30 years, actual rise rather than fall.
Alongside the rate decision, the Fed released its quarterly summary of economic projections. It included a revision higher in its unemployment forecast to 4.4% in 2024 and 2025, while the committee now expects a further 50 basis points of cuts this year.
Voiceover: What does the Fed decision mean for the RBNZ meeting in October?
Scott: Well, that’s the big question. It won’t necessarily affect what the RBNZ is going to do, but it does give committee members a free hit of sort to go for a 50 basis point cut without inflicting as much volatility on financial markets relative to if the Fed had opted for a 25 basis point cut themselves.
On the decision itself, interest rate markets are split between a 25 or a 50 basis point cut in the OCR. On one hand, a 50 basis point cut would be warranted, GDP for Q2 was negative and has been negative for 5 of the last 7 quarters, the job market continues to be weakened and Fed cut 50 basis points in a much stronger US economy.
On the other hand, the RBNZ signalled through its forecasts at the last monetary policy committee that there would be a gradual 25 basis point cut at each meeting for the remainder of the year, in order to move more aggressively the outlook for the economy would need to be worse than at the last meeting. The only major data point since the August meeting was GDP, which did fall to negative 0.2% however this was stronger than the RBNZ’s own forecast of negative 0.5%. Additionally, confidence surveys of consumers and businesses have actually risen following the RBNZ’s first cut suggesting a 50 basis point cut might not be warranted at this stage.
Voiceover: What should we be watching for in the near term?
Scott: Outside the RBNZ meeting on the 9th of October, we will get the latest inflation figures on the 16th. Which if there is a significant surprise to the downside, then we could see markets move to price in a greater rate cut in November than is currently expected.
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