The Month Ahead

Global equity markets continued their upward momentum in the first half of July. Investors appeared unphased by ongoing trade tensions, while easing geopolitical concerns in the Middle East helped support sentiment. Major share markets in the US, including the S&P 500 Index and Nasdaq 100 Index, reached record highs, and, as of 17 July, both were up more than 20% from their early April lows. European markets were also showing gains in the early stages of July, with the UK’s FTSE 100 Index hitting its record high. Closer to home, Australasian markets were more subdued, reflecting a more cautious tone among local investors.

In fixed interest markets, bonds were mostly lower (meaning yields were higher) over the first half of the month, with the US 10-year government bond yield above 4.4%, while Japanese bonds experienced a sharp sell-off. Concerns over fiscal sustainability in Japan pushed long-term government bond yields to multi-year, and in some cases, multi-decade highs. In New Zealand, bond markets faced pressure after the central bank held interest rates steady, signalling a wait-and-see approach.

Looking to August, all eyes will be on the Reserve Bank of New Zealand’s (RBNZ) August meeting, as investors assess whether the central bank will resume its rate-cutting cycle. The decision is likely to hinge on key economic data released in the lead-up to the meeting. Internationally, attention will remain focused on trade developments and economic indicators, particularly any signs that tariffs are beginning to weigh on business activity and consumer sentiment.

The RBNZ is scheduled to meet on 20 August, and as of mid-July, interest rate markets were pricing in a 70% chance of a 25 basis point cut. In July, the central bank paused its rate-cutting cycle to assess incoming data. However, the tone of the meeting suggested a bias toward further easing, citing a slowdown in the domestic economy following a strong start to the year.

August’s meeting will include a Monetary Policy Statement (MPS), where the RBNZ will update its forecasts for growth, inflation, employment, and the Official Cash Rate (OCR). While the rate decision will be closely watched, the forward guidance on monetary policy will be equally important.

Several upcoming data releases could influence the RBNZ’s decision and tone:

Unemployment (6 August): The Q2 report is expected to show a slight uptick from the 5.1% rate recorded in Q1. A higher-than-expected figure could strengthen the case for a rate cut.

Food Prices (15 August): Annual food price inflation rose 4.4% in June, adding pressure to the overall inflation outlook. The latest figures will be closely scrutinised for signs of persistent price pressures, which could influence the RBNZ’s decision on 20 August. 

Meanwhile, consumer spending will also be in focus. Electronic card transactions and Q2 retail sales will offer insight into household activity. Spending has been subdued due to higher mortgage rates, so any rebound would be a positive signal.

The ongoing trade war remains a dynamic and unpredictable situation, with announcements from President Donald Trump often made without prior notice. As we move into August, attention will turn to whether tariffs are beginning to show up in key economic indicators. Notable data releases this month include the inflation report, the Purchasing Managers' Index (PMI) – a broad measure of economic health – and retail sales figures. Retail sales have already declined for two consecutive months, hinting that US consumers may be scaling back spending amid growing concerns about the economic impact of tariffs.

We currently maintain a modest underweight position in US equities. Following a strong rally to new highs, valuations appear stretched, and recent economic indicators suggest a deceleration in growth alongside signs of a softening labour market. Additionally, elevated interest rates are beginning to impact the housing sector. Supply is rising while demand is waning, conditions that could exert downward pressure on home prices.

In contrast, we continue to hold an overweight position in US 10-year government bonds as we see upside potential. This reflects our expectation of slowing economic momentum and a belief that concerns over tariff-driven inflation may be overstated. In such an environment, the probability of monetary easing by the Fed increases, which would be supportive of bonds.