The Month Ahead

March 2024

Equity markets have had a good start to the year, with key US indices hitting new record highs. As of 29 February, the S&P 500 Index was up 6.8% year-to-date and punched through the psychologically important 5,000 level. The Dow Jones Industrial Average (an index made up of 30 of the largest US companies) also hit an all-time high. Share prices are higher on resilient economic data, and an AI (artificial intelligence)-fuelled rally.

It’s a theme seen in other major markets around the world too, with key indices in Japan, Europe and Australia also reaching new highs. Closer to home, the NZX 50 Index has struggled and is down 0.2% year-to-date, as the weight of interest rate hikes is starting to be seen in some economic data and company results.

In contrast, bond markets have retreated against the backdrop of stronger-than-expected inflation data, with the world’s central banks seemingly pushing back against the prospect of interest rate cuts anytime soon. 10-year bond yields have risen by over 35 basis points in the US and New Zealand this year, which means it’s been a tough time for bond investors, because as bond yields rise, their prices fall.

As we look ahead to March, central bank rhetoric remains front and centre, as will economic data – particularly when it comes to inflation, jobs and consumption. For more, here’s ANZ Investments’ Month Ahead.

This video summarises the main points of this article.

Iain Cox, Head of Australasian Fixed Interest and Cash.

What decision did the Reserve Bank of New Zealand make last week?

As expected, the RBNZ left the Official Cash Rate unchanged at 5.5% and reiterated that monetary policy would have to remain in restrictive territory for now. 

However, it noted that the risks to the inflation outlook had become more balanced. It also softened its stance, with its new forecasts suggesting it is less likely the OCR will move higher from its current level. 

Its statement said that over the last year, the New Zealand economy had evolved broadly as anticipated, adding that core inflation and most measures of inflation expectations have declined.

What has the data told us?

It’s been a mixed bag when it comes to recent economic data. On the one hand, we’ve seen sticky domestically generated inflation, driven largely by housing-related prices. We’ve also seen labour market pressures remain.

On the flip side, there have been clear signs that high interest rates are impacting on New Zealand households through a broad weakening of the economy. Growth in the third quarter of last year fell into negative territory, while recent retail sales data underlined a significant fall in consumer spending.

How are we positioned in light of the RBNZ decision?

Our view is that interest rates are restrictive enough at current levels and are having the impact the central bank had hoped for when it began lifting rates in 2021. In light of this, we believe the economy will continue to slow, and inflation normalise.

While we do not expect the RBNZ to cut interest rates until the first half of next year, we do expect New Zealand bonds to continue to price out the risk that the RBNZ will hike rates again. Although New Zealand bond yields have fallen off earlier highs to around 4.75%, valuations still suggest better returns from bonds going forward, especially given elevated recession risks. It’s for this reason that we remain long duration in our New Zealand bond portfolios which basically means we are overweight. Also, within our diversified portfolios we retain the same position being overweight New Zealand bonds.

Central banks in ‘wait-and-see’ mode – eyes on economic projections in the US

Progress on inflation has slowed over the last few months, supporting the narrative that the final drive to get it down to target levels will be the hardest. US annual headline inflation in January (as measured by the Consumer Price Index) was 3.1%, which was lower than the previous month but higher than expectations – all but ruling out early interest rate cuts.

Therefore, it is expected on 20 March, that the US Federal Reserve (the Fed) will leave its key policy rate unchanged. Although the decision is mostly set in stone, we can expect a lot of attention on the accompanying summary of economic projections. In December, the Committee projected up to three interest rate cuts in 2024, but after several stronger-than-expected economic data points (growth, inflation and employment), the risk has shifted towards fewer cuts than the market is pricing in.

Inflation progress in Europe has also slowed, with core inflation there on the stronger side, however the European Central Bank (ECB) has revised down its forecasts for growth and inflation which points to a softening picture going forward. Meanwhile inflation in the UK remains well above the central bank’s target rate (although prices fell in January on a monthly basis). Given this month’s slower inflation progress, central banks in Europe are likely to hold policy rates steady in March.

Overall, as we head into March, global central banks are largely on the same page, with inflation heading in the right direction, but not enough to warrant interest rate cuts in the near future. Moreover, upside risks to inflation remain; in particular, oil price volatility and wage pressures from still-tight labour markets, particularly in the US.

RBNZ says risks to the inflation outlook have become ‘more balanced’

Following its meeting late in February, the Reserve Bank of New Zealand (RBNZ) left the Official Cash Rate (OCR) unchanged at 5.50%. Its accompanying statement said “core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced”.

Accompanying economic forecasts evidenced the RBNZ’s less hawkish sentiment. These showed a smaller chance (although still a chance) of another rate hike, while it brought forward the timing of its first rate cut; from the second half of next year, to the first half. Meanwhile, it still expects inflation to fall back to below the upper limit of its target level (3%) by the third quarter of this year.

Although inflation is far from the central bank’s target rate, there are clear signs that high interest rates are having a material impact on New Zealanders. The domestic economy shrank 0.3% in the three months ending September 2023, and on a per-capita basis it contracted by 0.9%.

Meanwhile, fourth-quarter retail sales data underlined insipid household demand. Sales volume dropped 1.9% in the three months ending December 2023, marking the eight consecutive quarter of decline, with 14 out of 15 retail sectors experiencing a decline compared to the previous quarter.

We remain defensively positioned in our diversified portfolios

Growth has picked up in the US economy over the last few months, in contrast to the weaker growth environment we’ve seen in Europe and New Zealand. An extended period of tight monetary policy is already starting to weigh on countries that feel the effects of higher interest rates more quickly – such as here in New Zealand, where, for example, due to shorter fixed term mortgages, consumers are already rolling onto higher mortgage rates. We expect this should be enough to tip these economies into a mild recession.

On the inflation front, we expect core inflation to make slow progress towards target levels, with central banks holding interest rates in restrictive territory until they have confidence that inflation is anchored. This suggests that monetary policy will diverge – with the weakening economies being able to ease, while the US may need to hold rates higher for longer if growth and labour markets remain this tight. 

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 economic growth will continue to slow as we move through 2024, a scenario where bonds should outperform, and equities face headwinds.

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Important information

This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 29 February 2024, 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.