The Month Ahead

April 2024

In March, equity markets continued their good start to the year, with key US indices hitting new record highs, while in Europe, equities also trended higher. New Zealand equites were also up, despite news the economy entered a recession in the final quarter of 2023. As of 22 March, the S&P 500 was up more than 2.5%, the Euro Stoxx 50 up more than 3% and the NZX 50 was 2% higher.

After their sell-off in February, bond markets clawed back some gains in March, especially in New Zealand, with some weakening of economic data suggesting the likelihood of further rate hikes from the Reserve Bank of New Zealand (RBNZ) is fading.

Looking forward, there’s no doubt central banks remain front-and-centre as investors look for direction on the path of interest rate policy – especially now, as many have signalled their next move is likely to be a cut.

This video summarises the main points of this article.

Erin Hasemore-Slieker, Senior Investment Analyst

What have central bank decisions in March told us? 

The Federal Reserve dominated proceedings in March where, as expected, it left interest rates unchanged. The Committee stuck to their prior forecast of three interest rate cuts this year, despite robust economic data and signs services inflation may remain sticky. 

Elsewhere, the Bank of Japan went the other way, and it lifted interest rates, becoming the last central bank to end negative interest rate policy. For several years in the 2010s, the Japanese economy struggled with periods of deflation. However, in late 2023 and early 2024, inflation rose to decade highs, driven largely by wage pressures, which was the catalyst for the small increase in interest rates.

And finally, in March we also saw the Bank of England, the Reserve Bank of Australia and several other central banks leave interest rates unchanged, however most signalled the next move would be a cut.  

How has monetary policy affected investment markets?

With most central banks signalling that interest rates have peaked, equities have moved higher with several markets in the US and Europe reaching record highs, while in bond markets, it’s been fairly subdued. Most government bond yields have drifted higher this year although they have remained in a relatively tight range. 

How are things looking in New Zealand?

The New Zealand economy is clearly slowing. Retail spending is declining, growth data has showed the economy entered a recession in the final quarter of last year – and on a per capita basis the economy has contracted sharply.

Although inflation remains stubbornly high, we don’t think the weakening economic backdrop supports any further interest rate hikes. It appears that the next move will be an interest rate cut – but if inflation persists, it may not be for a while. 

What does all this mean for our fundamental outlook?

We are comfortable that inflation has peaked and the global economic cycle is peaking as well. This should support our view that the next move for interest rates is lower – a scenario where bonds should outperform. 

In equities, although we have seen some markets reach record highs, we expect them to face some headwinds in the medium term as the global economy slows and consumers and businesses scale back spending as the cumulative effect of higher interest rates starts to flow through. 

Most central banks are not cutting interest rates – yet

Most of the world’s major central banks remain on hold as they await further confirmation that the interest rate hikes over the past two years have slowed inflation, cooled economic activity, and loosened labour markets, which were a significant contributor to rising inflation during 2022 and 2023.

Of the major central banks, the US Federal Reserve (the Fed), the European Central Bank (ECB) and the Bank of Canada (BoC) could begin cutting interest rates as soon as June, according to interest rate market pricing. Confirmation of potential June interest rate cuts will be in key economic data released in April, including employment figures and inflation data.

Bucking the trend was the Swiss National Bank (SNB), which cut interest rates, saying it was comfortable with where inflation was headed and added that the cut should help boost economic activity.

Inflation is slowing in Europe, stalling in the US

Inflation remains the bellwether for global financial markets as central bankers wait for confirmation that inflation is headed back to their target levels.

Several economies in Europe have seen marked declines in inflation, including some big downside surprises, where the economic data came in much lower than expected. In the UK, annual inflation fell to 3.4% in February, a big decline from the 4% recorded in January, giving hope that the Bank of England (BoE) could cut interest rates and provide some much-needed relief for borrowers.

Meanwhile, inflation figures in Europe delivered a mixed bag for policymakers there. While eurozone’s headline figure fell to 2.6% in February, down from 2.8% the prior month, both it and the core figure were higher than expected.

It's been a little different in the US, where annual inflation – after falling to about 3% in the middle of 2023 – has remained stubbornly high around the 3-3.5% level, largely driven by rising shelter costs.

The New Zealand economy is slowing – RBNZ and inflation data in focus

Economic news out of New Zealand has been downbeat of late with recent growth data showing the economy contracted by 0.1% in the final quarter of 2023, meaning it entered a technical recession, while retail sales have fallen for eight consecutive quarters, a clear sign that consumers are clamping down on spending.

However, weaker demand across the board is yet to dent inflation, which remains above 5% – one of the highest rates in the developed world. This is creating a conundrum for the RBNZ, who would be reticent to hike interest rates into a slowing economy.

On 10 April, we will see just how the central bank plans to navigate this tricky situation when it meets once again. In terms of an interest rate decision, it’s widely expected to leave the Official Cash Rate (OCR) unchanged at 5.5%, but investors will be looking for clues in the guidance from the central bank.

Adding to a busy April is the release of Q1 inflation data on April 17, which unfortunately (for the central bank at least) comes after its rate-setting meeting. Given the worries about elevated inflation in a slowing economy, policymakers and investors alike will be hoping the rate of inflation continues to move closer to the RBNZ’s 1-3% target rate.

We remain defensively positioned

The US economy continues to hold up relatively well compared to most of its global counterparts that are experiencing slowdown as the cumulative effect of higher interest rates are starting to take their toll. This has been felt particularly hard in New Zealand as higher mortgage rates have stifled consumer spending, which put the economy into a recession in the latter stages of 2023.

At a tactical level, we remain defensively positioned, reflected by our overweight position to New Zealand and global bonds, while maintaining a modest underweight to global equities. We believe that the economic cycle is peaking, and growth will trend lower as we move through the coming months. As this unfolds, bonds should outperform, while we could expect equity markets to face some headwinds.

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