The Month Ahead

September 2023

Global equity markets faced some headwinds in August, ending for now what’s been a good period for share markets. The S&P 500 is on track to end a streak of five straight monthly gains, while the high-flying NASDAQ 100, which at one point was up more than 40% this year, is also on track to end the month lower.

Australasian markets were in a similar position, with the NZX 50 and ASX 200 both set to finish the month lower. The NZX 50 traded to its lowest level of 2023 as rising bond yields weighed on the interest rate-sensitive index.

As we look to September, central bank meetings will be front and centre, with many appearing to be at or near the end of their interest rate hiking cycles. For a look at these central bank meetings, and more, here’s ANZ Investments’ Month Ahead.

[Video: Question and answer session with Maaike Van Tol, ANZ’s Head of Asset Allocation, New Zealand.]

Maaike Van Tol: Well, over the last few months we’ve seen a bit of a change. There’s now the expectation that monetary policy will stay tighter for longer. Coming into this year, people expected a recession and that interest rates cuts would happen later on this year. Now that expectation has been moved into 2024.

Question: What have been the main drivers of this change?

Maaike Van Tol: Well, there’s been a few things really. First of all growth has been much stronger, especially in the US (United States). The latest Atlanta Fed GDPNow estimate is above 5%.  So that’s really much too strong to expect interest rate cuts. And, second of all, inflations peaked in the US; it’s back down towards 3% but there are still a number of things that are keeping inflation higher which are a cause for concern. First of all, oil prices have reverted higher, second of all, inflation, shelter inflation is still very, very high. And it is coming down, but you know, there’s a question as to whether of not it will fully normalise. And lastly, wages inflation is still very high as well, and that puts pressure on services inflation. So, the inflation picture is still a bit concerning. And central bankers always say that monetary policy works with long and variable lags and that’s certainly what we’ve seen this year.

Question: What do you mean by monetary policy lag?

Maaike Van Tol: Monetary policy lag means that the length of time it takes between, when central banks start raising interest rates and when you start seeing the effect on the broader economy. It can be quite a long time; anything between 12 and 24 months. Now, we’ve been in a hiking cycle for longer than 12 months, but we’re not yet really seeing an impact of tight monetary policy on economic growth and on inflation.

Question: How does the situation in New Zealand compare to overseas?

Maaike Van Tol: Well, in New Zealand we’ve also been raising interest rates here very rapidly. And the Reserve Bank of New Zealand have said that they’ll keep interest rates at tight levels for a long time to get inflation under control. The key difference here is that inflation is higher, it’s currently at about 6%, which is higher than what we’re seeing overseas. So, the inflation situation here is a bit more concerning.

Question: Are there any outliers?

Maaike Van Tol: China’s probably the most notable outlier. There we’re seeing deflation or negative inflation, rather than inflation. There’s been some issues with property developers there and also an asset manager as well. So that’s clearly a source of concern. Youth unemployment is also high at above 20% and so their economic situation is much more concerning.  And so, as a result the Peoples Bank of China have decided to start cutting interest rates, just a little bit. And that’s also in contrast to what’s happening around the rest of the world.

Question: How are we positioned for the current environment?

Maaike Van Tol: We’re overweight bonds. We think that with you know New Zealand interest rates being above 5% and you know, US (United States) being above 4.3%. That’s quite high levels relative to what we’ve seen over the last decade or so. So that’s certainly very attractive levels to be overweight bonds. On the equities side, we’re a little bit underweight. Tight labour markets, higher interest rate costs, tight credit conditions – all of these things put businesses under pressure and so we see valuations being slightly expensive given that fundamental view.

Important Information

Published 22 August 2023. 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 negative.

ANZ Bank New Zealand Limited

A busy month for central banks – with only some expected to move interest rates

In September, many global central banks meet where it is expected several will keep interest rates unchanged, reflecting the belief that inflation – in their eyes – is slowing to a point where they are comfortable in a ‘wait and see’ mode.

In the US, the Federal Reserve (the Fed) appears likely to leave its fed funds rate unchanged, but what will be of most interest is what they say, not what they do. The September meeting will also see the Fed provide an update of its economic projections. This forward guidance will provide crucial insight into the path of monetary policy over the coming months – especially as debate remains as to whether the Fed has reached its terminal rate – the rate it expects the fed funds rate to peak in this cycle.

Also expected to keep interest rates unchanged is the Reserve Bank of Australia (RBA). The RBA has kept its key policy rate unchanged at its past two meetings, confident that inflation has peaked, and the economy is showing signs of slowing, which will help bring inflation down. Reinforcing this view was July’s employment data, which showed the unemployment rate rose to 3.7% from 3.5%, while the number of full-time workers fell.

Where we could expect to see interest rate rises is in Europe, where the European Central Bank (ECB) and the Bank of England (BoE) appear to be still in the tightening phase.

After nine straight hikes, ECB President Christine Lagarde said in July that a pause was on the cards for September but added that “it would not necessarily be for an extended period of time”. Given this message, the market is pricing in about a 50% chance of a further 25 basis point hike. Meanwhile, in the UK, the BoE is all but set for another 25 basis points as it struggles to break the back of inflation, which is one of the highest of all developed economies.

New Zealand’s economy expected to have grown in Q2

After back-to-back quarters of negative growth (a technical definition of a recession), it is expected the New Zealand economy bounced back in the second quarter, when Q2 GDP data is released on 21 September.

The New Zealand economy has been showing signs of waning this year with spending across the board slowing as households struggle with rising mortgage repayments. This was partly confirmed by the news that retail sales fell for the third straight quarter and the fifth decline in the last six quarters.

However, with signs the house price sell-off is slowing, a pickup in immigration, and Cyclone Gabrielle recovery spending, it is expected the economy expanded in the second quarter.

We remain defensive amid ongoing uncertainty

At a tactical level, we remain underweight to global equities and overweight to domestic and international fixed interest. These positions reflect the ongoing uncertainties and potential challenges financial markets could face over the medium term. Our view is that the global economy will start to slow into the back end of 2023 and into 2024, as the cumulative effect of the interest rate hikes weigh on global activity. In this scenario, we can expect equities to face headwinds, while bonds should outperform.

Important information

This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 30 August 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.