The Month Ahead

October 2022

September proved to be a challenging month for equity markets, as rising interest rates and a higher-than-expected inflation number in the US saw markets trade lower, with some indices on track to finish the month down by more than 5%. Against the backdrop of rising interest rates, bonds also continued to struggle, making it a challenging month for investors across the board.  

As we head into the final quarter of the year, uncertainty is the best way to describe the current environment. Rapid inflation, rising borrowing costs, and geopolitical unrest are just a few of the issues front and centre. To unpack all this, here’s what ANZ Investments is watching this October.

Reserve Bank of New Zealand to continue its monetary policy tightening

The Reserve Bank of New Zealand (RBNZ) is expected to raise the Official Cash Rate (OCR) by another 50 basis points on 5 October 2022 as domestic pricing pressures remain elevated. Another 50 basis points would take the OCR to 3.5%, its highest level since 2015.

Although we saw some strong growth data earlier this month (as GDP rose 1.7% in the second quarter of 2022), it’s unlikely to deter the RBNZ from slowing the pace of hikes given its commitment to deal with inflation. In its August Monetary Policy Statement, the RBNZ said “The Committee remains resolute in achieving the Monetary Policy Remit”.

It’s worth noting that October’s meeting is a Monetary Policy Review as opposed to a Monetary Policy Statement, so it won’t include a press conference or any accompanying economic updates or projections.

European Central Bank meeting

In other central bank meetings, the European Central Bank (ECB) is expected to raise its key policy rate for the third time in a row when it meets on 27 October. 

Although it appears growth is declining amid the energy crisis across the continent, the ECB has made it clear that taming inflation is the priority. In a recent speech, ECB President Christine Lagarde said the central bank was prepared to raise interest rates above the neutral level if there were evidence high inflation “risked de-anchoring inflation expectations”. 

Interest rate markets, as of 27 September, are pricing in an increase in the deposit rate of between 50 and 75 basis points, which would take the ECB’s key interest rate to its highest level in more than a decade.

Inflation data will again be a focus

October will see further inflation data releases across many of the key economies that we follow. At the top of the list is the US, where after August inflation data surprised on the upside (8.3% year-on-year), policymakers and investors will be closely watching September’s data.

There could be some reprieve with gas prices at the pump continuing to fall, however, housing-related inflation is likely to remain sticky with rental price increases still feeding into current inflation data.

Elsewhere, inflation data in New Zealand for the second quarter is released on 18 October. Although it will come after the RBNZ’s meeting, it could have an impact on monetary policy, with interest rate markets continuing to price in a neutral rate of around 4.5%, 150 basis points higher than the current level of the OCR.

Will interest rate hikes start to slow the labour market?

Although inflation remains front and centre when assessing the economic outlook, labour markets are becoming a key indicator of how central banks are faring in their quest to slow inflation and engineer a so-called ‘soft landing’ – something that appears to be more challenging by the day.

So far, the interest rate hikes by the US Federal Reserve (the Fed) have yet to cool wage inflation, which has been underpinning demand. Policymakers had hoped the monetary tightening to date would have cooled demand and eased labour conditions, which would go a long way in slowing overall inflation. However, that has not been the case.

With a growing focus on the labour market, the US employment report for September will be closely watched, especially the wage inflation component. Last month’s data showed average hourly earnings up 5.2% from a year ago.

Geopolitical tensions on the rise 

The conflict between Russia and Ukraine escalated in September when Russian President Vladimir Putin announced he would be calling up 300,000 reservists (citizens with some military experience) as his country comes under pressure from Ukrainian forces. In a televised interview, President Putin also warned the West that he is prepared to escalate things further, inferring the use of nuclear weapons. "If the territorial integrity of our country is threatened, we will without doubt use all available means to protect Russia and our people - this is not a bluff”, he said.

Against the backdrop of the energy crisis in Europe, any escalation of the conflict could exacerbate already stretched supply chains and energy resources. For this reason, the conflict in Eastern Europe is firmly on our radar.

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Important information

This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 27 September 2022, 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. 

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