The Month Ahead

After a challenging few months, equity and bond markets had a good November, and were on track to finish the month higher thanks in part to economic data that showed pricing pressure in the US has eased. As of 27 November, the S&P 500 was up more than 8% on the month, while closer to home, New Zealand’s NZX 50 and Australia’s ASX 200 were both up about 4%.  

In fixed interest markets, government bond yields in most countries were lower, with 10-year yields in the US, the UK and New Zealand, down as much as 50 basis points making it a good month for bond investors – as bond yields fall, the value of the underlying bond increases.

Although central banks appear to be on hold for now, December sees several central bank meetings where the focus will be more on what they say as opposed to what they do as investors look for further confirmation that interest rates will remain on hold in the near term. 

The US Federal Reserve (the Fed) concludes its two-day meeting on 13 December, where it is expected to leave the fed funds rates unchanged. It would be the third straight meeting where the Fed has left interest rates unchanged. In fact, interest rate markets, as of 27 November, suggest the next move in interest rates will be a cut.

Although a decision on interest rates is all but a foregone conclusion, the Fed will release its quarterly update of economic projections. These will attract plenty of attention as investors look to see if the Fed believes it has in fact ended its hiking cycle, and if the next move is to be a cut, when the Committee expects this could come. 

Along with the future path of interest rates, the Fed updates forecasts on employment, GDP and PCE inflation. In September, the Fed projected it would need to raise interest rates one more time, while it forecast unemployment at 3.8% by the end of the year, core PCE inflation of 3.7% and real GDP of 2.1%. 

After raising its key policy rate by 25 basis point in November, the Reserve Bank of Australia (RBA) is expected to keep interest rates unchanged when it meets on 5 December. The RBA restarted its rake-hiking cycle early in November, after some economic data pointed to a potential return of pricing pressures, while a buoyant housing market and rental prices appear to be posing upside risks to inflation. 

Although the RBA is expected to keep interest rates unchanged in December, there was a small increase in the probability of a hike to about 8%, after some relatively hawkish comments in the RBA minutes from its November meeting.

“Members noted that the risk of not achieving the board’s inflation target by the end of 2025 had increased and that it was appropriate that monetary policy should be adjusted to mitigate this”, the minutes said. 

Elsewhere, the European Central Bank (ECB) and the Bank of England (BoE) are also expected to leave their key policy rates unchanged when they meet on 14 December.

At a tactical level, we remain defensive, reflected by our overweight position to New Zealand and global bonds, while we maintain a modest underweight to global equities. We believe that growth will slow in the early stages of 2024, a scenario where bonds should outperform, and equities will face headwinds. 

At a macroeconomic level, inflation is moderating where many central banks are done with their hiking cycles. Meanwhile, labour markets are starting to show signs of loosening, which could slow wage growth, which has been a significant contributor to overall inflation over the past two years.