Market review

A summary of how financial markets performed during the final quarter of 2023.

It was a good finish to the year for financial markets with both bonds and equities recording strong gains thanks in part to a slowing of inflation and an expectation that central banks were finished raising interest rates.

Global markets

Global equity markets had a strong finish to the year, buoyed by the prospect that some of the world’s major central banks had finished their interest rate hiking cycles. In the US, the S&P 500 Index gained 11.7%, as it edged closer to an all-time high. Meanwhile, the tech-heavy Nasdaq 100 Index extended its gains by a further 13.8%. 

Most other markets took their lead from the US. In Europe, the Euro Stoxx 50 Index was 8.6% higher. While Japan’s Nikkei 225 Index underperformed other major markets, it still gained 5.2%, as its market hit a new 33-year high in November.

A key laggard was the UK share market, which gained only 1.6% given its significant exposure to energy companies, which struggled as oil prices fell.


The Fed  leaves interest rates unchanged, but its ‘pivot’ sends markets higher

The US Federal Reserve kept interest rates on hold throughout the quarter, maintaining its target range of 5.25% to 5.50%. However, following its December meeting, attention turned to Committee members’ updated expectations for the path of interest rates, as the Fed’s closely watched dot plot of interest rate expectations signaled that its inflation fight would no longer require another rate hike, and instead implied three quarter-point rates cuts in 2024.


Inflation weaker and labour market pressures easing

Markets also got a boost from easing US inflationary pressures. While November’s CPI (Consumer Price Index)   data showed that the prices of goods and services edged higher, it was in line with expectations, and the annual rate continued to decline, falling to 3.1%.

Falling gasoline prices have helped keep inflation in check, while shelter prices (rents) – which make up a third of the CPI weighting – continue to show a steady decline having peaked earlier in the year.

An easing labour market has also been good news for Fed policymakers. Although the number of people hired (non-farm payrolls) grew faster than expected in November, the unemployment rate rose to 3.7%. And while wages are running higher than what would be consistent with the Fed’s 2% inflation target, they have gradually been cooling off too.


Oil prices fall sharply

Oil prices fell despite ongoing geopolitical unrest following October’s attack by Hamas on Israel. In fact, the price of a barrel of oil fell 21% over the quarter (in USD terms), as investors worried about sluggish demand for energy in China, and as oil output in the US remains close to record highs.

New Zealand market

Following their global counterparts, New Zealand equities also finished higher over the quarter, with the NZX 50 rising 4.2%. It’s return lagged some of its global shares as the Reserve Bank of New Zealand (RBNZ) maintained a relatively hawkish stance on monetary policy amid stubbornly high inflation. 

Despite the RBNZ maintaining its hawkish stance, New Zealand bonds finished the quarter higher, largely driven by US and European markets where their respective central banks signalled that they had finished lifting interest rates.


RBNZ suggests more interest rate hikes could come

The Reserve Bank of New Zealand left the Official Cash Rate (OCR) unchanged throughout the quarter at 5.50%. However, in November, the Committee struck a rather hawkish tone, saying “If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further”.

Furthermore, the Committee raised the neutral rate projections (the rate it expects the OCR to peak) to 5.69%, which implies a good chance of a further interest rate hike.


Economy shrinks, tempering the expectations of further rate hikes

Expectations of more rate hikes from the RBNZ (following the lifting of its neutral rate) were tempered a little with the news the domestic economy shrank in the third quarter, declining 0.3%, which was well below forecasts, including those of the Reserve Bank.


Inflation falls, but remains stubbornly high

Inflation data showed that the economy continues to struggle against the backdrop of stubbornly high prices. Although the annual rate of inflation fell to 5.6% in the September quarter, it is still well above the RBNZ’s target rate. 

Furthermore, non-tradable inflation, which is domestically driven and can be more challenging to bring down, was at 6.3%.

Important information

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