The Month Ahead

December 2023

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. 

This video summarises the main points of this article.

[This video is a question and answer session with Ray Jack, Senior Investment Analyst, ANZ New Zealand, summarising the main points of the article]

[Text on screen: The Month Ahead - December 2023]

Voiceover and text on screen: What is the current state of inflation?

Ray: We've come from a period where inflation's been in the highest single digits. We look at the US, which is the biggest economy in the world, inflation's tracked down to 3%, and it's remained sticky around that level for five months. Locally in New Zealand, inflation has been quite strong, but it's starting to deteriorate, and that's because the employment market's starting to weaken. 

Voiceover and text on screen: What do central banks mean when they say “higher for longer”?

Ray: Higher for longer, for central banks, that means that inflation is not coming down fast enough to a level that they're comfortable with, which tends to be 1% to 2%.

Voiceover and text on screen: Why “higher for longer”?

Ray: It's been stronger because of high savings rates, a strong employment market and strong fiscal spend. But monetary policy works with a lag, and what we're seeing here locally, it's taking longer for people to refix their mortgage rates at the headline interest rates. 

Voiceover and text on screen: What does all this mean for bond prices?

Ray: We've just been through the worst bond bear market in 40 years. And as the economy slows, we move into the phase called recession, which is the period where bonds do really well. And so what is a recession? Essentially, it's where unemployment shoots up and interest rates drop. In that circumstance, if you own bonds prior to that event, they tend to perform really well.

Voiceover and text on screen: How are we positioned for the current environment?

Ray: We've got an overweight position in bonds. We've got high quality government bonds and corporate bonds. If we move into recession, we've got a strong focus on quality in our portfolios.

[Text on screen: Important information: Information can change, is general, and not advice. In good faith, we've used reliable sources to get this information, but we don't promise it's accurate, complete, or suits you. To the extent the law allows, we don't accept responsibility for loss or damage if you rely on or use this information. Past performance is not indicative of future performance. We don't guarantee performance, which depends on many things, and could be positive or nagative. ANZ Bank New Zealand Limited]

Fed likely to hold rates steady – all eyes on its economic projections

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%. 

Despite recent pricing pressures, RBA tipped to keep rates unchanged; ECB and BoE also on hold

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.

We remain defensive 

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.

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This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 27 November 2023, and is subject to change.

This document is for information purposes only and is not to be construed as advice. Although all the information in this document is obtained in good faith from sources believed to be reliable, no representation of warranty, express or implied is made as to its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability for any direct or indirect loss or damage arising from your use of this information.

Past performance is not indicative of future performance. The actual performance any given investor realises will depend on many things, is not guaranteed and may be negative as well as positive.