The Month Ahead

The challenging start to the year for investors continued in May, with many global equity indices down by as much as 5%, with around a week left to go. The underperformance continues to be felt in the technology sector, with higher interest rates weighing negatively on valuations. In the US, the growth-oriented NASDAQ 100 Index hit its lowest level in around 18 months, while at home, the NZX 50 Index fell to a near two-year low.

Meanwhile, bond markets saw some gains, with government bond yields drifting off their recent highs as concerns of an economic slowdown saw a renewed demand for ‘safe haven’ assets.

As has been the theme for most of the year, inflation, interest rates, central bank policy and economic growth all remain at the forefront of our discussions here at ANZ Investments—and this will continue as we head into June. With this, and much more on the cards, here’s a look at what lies ahead in June. 

The US Federal Reserve (the Fed) is tipped to lift the fed funds rate by a further 50 basis points in June, as it marches ahead with its tightening cycle, following most other central banks in raising interest rates to slow inflation. According to the CME FedWatch Tool, which tracks interest rate probability of the fed funds rate, as of 24 May, there was a greater than 90% chance of a 50 basis point hike.

However, and more importantly, the Fed will also deliver updated economic projections. These are more important as they indicate what policymakers are expecting in the months and years ahead with regards to inflation, growth and when and where the fed funds rate will likely peak.

Along with the Fed, there are a host of other central banks meeting in June, with all addressing the same thing – inflation. Of particular note is the European Central Bank (ECB), which has lagged most other central banks in tightening policy as it deals with the fallout of the war in Ukraine, which has exacerbated the cost of living with energy prices surging. While the war has fuelled inflation, the ECB has, to date at least, erred on the side of caution, believing an interest rate hike would add to volatility and worsen the growth outlook.

However, it appears policymakers there are edging closer to lifting interest rates in the coming months. At its 9 June meeting, the expectation is that the ECB will refrain from raising its policy rate, but will lay out a path forward, which could see the first interest rate hike in July.

Elsewhere, the Bank of England has already raised interest rates four times since December and another hike could be on the cards this June, while the Bank of Canada could also raise its policy rate by at least 50 basis points when it convenes early in the month.

Less than a week before the Fed meets, the closely watched inflation data for May is released, which is expected to show CPI hovering around the 30-year high of 8%.

Within the CPI report, a key sector to note will be the shelter cost component (a measure of housing costs based on rents, rather than house prices). With signs the US housing market is slowing, albeit off a fast pace, a pullback in shelter prices could ease some concerns for Fed officials. Some other idiosyncratic sectors that drove headline inflation higher, such as used cars, will be another area to watch. 

Finally, the economic impact of the strict COVID lockdowns in China will be better assessed after an array of tier one economic data is released this June. Retail sales figures are likely to show a sharp decline in spending, which won’t be a surprise. However, the manufacturing and services PMI (purchasing managers’ index) will be a better gauge as it measures the prevailing trend of the broader economy in each sector.