US equity markets moved to all-time highs in September, helped in part by a 50 basis point cut by the Federal Reserve (the Fed), which provided some much-needed relief for borrowers. Meanwhile, ongoing signs that growth is holding up is raising the likelihood that the economy is headed for a soft landing.
As of 23 September, the S&P 500 and Dow Jones Industrial Average were at all-time highs, and both were on track to record their fifth straight month of gains. Meanwhile, European markets were not faring as well, with most indices lower on the month.
Closer to home, the NZX 50 had retreated from a two-and-a-half-year high and was trading around flat on the month, while it was better news in Australia, with the ASX 200 trading to a new record-high.
In fixed interest markets, bond prices were higher across the board, pushing yields lower, as most developed central banks around the world had either begun, or were signaling, they were ready to cut interest rates as inflation continued to trend back towards target rates.
With several central bank meetings, including here in New Zealand and the US election on the home straight, there is plenty to keep an eye on this October. For a look at the key themes, here’s The Month Ahead for October.
Fed cuts interest rates – RBNZ set to follow
In September, the Fed kicked off its interest rate cutting cycle by reducing the fed funds rate by 50 basis points. It was the first cut since the pandemic, and outside the pandemic cut, it was the first 50 basis point cut since the financial crisis in 2008. In summary, the Fed said they had gained greater confidence that inflation was on the right path, and now were paying closer attention to the labour market as the unemployment rate has risen from 3.5% to 4.2% in August over the past 12 months.
With the Fed meeting over, all eyes turn to the Reserve Bank of New Zealand (RBNZ) meeting on 9 October. It is expected the RBNZ will cut interest rates for a second time in about 10 weeks, as the domestic economy falters, and inflation continues to fall back towards the central bank’s 2% target rate. As of 23 September, the market is pricing in about a 50% chance of a 50 basis point cut, which would take the Official Cash Rate (OCR) back to 4.75%.
The case for a 50 basis point cut comes down to how fast the RBNZ believes the economy is decelerating – especially when it comes to the labour market. If they are comfortable that the labour market is easing, but not at a rapid pace, then we could see the RBNZ continue with a more measured 25 basis point cut like it did in August.
Elsewhere, the Bank of Canada (BoC) is expected to cut interest rates on 23 October, while the European Central Bank (ECB) will weigh an interest rate cut on 17 October, but interest rate markets suggest it is less likely to cut.
US election only a month away; Harris moving ahead in national polls
It’s down to the final stretch for the US election on 5 November, and after a second assassination attempt on former President Donald Trump, it appears the final weeks will be anything but a non-event. Trump and Harris continue to make their push in the key swing states across the Mid-West and the Sun Belt.
After a strong debate performance, Vice President Kamala Harris has edged ahead in most national polls. She has – to date – successfully wound back many of the unpopular policies she ran on in the 2019 Democratic Primary, and by shifting to the centre, Harris has turned around what was looking like a bleak outcome for the Democrats before she rose to the top of the ticket. Meanwhile, the Trump campaign has shown some cracks of late, with his attacks on immigrant communities not sitting well with Americans.
The shift in fortunes between the two parties showed in a 15-17 September YouGov/The Economist poll, which had Harris leading national polls by four points. Furthermore, Harris appears to be improving in the all-important Mid-West swing states of Michigan, Wisconsin and Pennsylvania.
It is uncertain whether the two candidates will debate again, with Harris accepting a CNN debate on 23 October, but Trump has said the debate is too close to the election and subsequently has so far declined the debate.
We brought our international fixed interest position back to neutral
In late September, we brought our overweight position to international fixed interest back to neutral. Global bonds have had a strong period, and this position have proved beneficial to fund performance, but given the extent of the move we feel the risk – especially in the short term – is now skewed towards a pullback in bonds (a move higher in yields). Therefore, we felt the prudent move was to square off our overweight position.
Interview with Scott Johnson, Assistant Fund Manager
Scott: Hi, I’m Scott from ANZ Investments. This is The Month Ahead for October.
Voiceover: What is the state of play in financial markets?
Scott: It was a volatile start to September with global share markets retreating after economic data in the US pointed to a possible slowdown in the economy. Manufacturing surveys, which are generally good indicators of the prevailing health of the economy, came in weaker than expected, while employment indicators such as non-farm payrolls, initial and continuing jobless claims showed conflicting pictures of the US economy.
Despite this, US equity markets recovered their early losses, and headed into the all-important Fed meeting at or near where they began the month.
Voiceover: And what happened at the Fed meeting?
Scott: The Fed lowered its key interest rate by 50 basis points, which was somewhat of a surprise, economists were all calling for a 25 basis point cut given the ongoing strength in the US economy but Interest rate traders were betting big on a 50 basis point cut due to the perceived slowdown of employment. For reference, outside of the emergency cuts during the COVID pandemic, this was the first time the Fed had cut rates by more than 25 basis points since the financial crisis in 2008.
The Fed said it had gained greater confidence that inflation is moving sustainably closer to its 2% target rate. It is also hoping to prevent any spike in the unemployment rate, which has risen from 3.5% in July last year to 4.2% just as recently as last month. What was further surprising about the 50 basis point cut was Jerrome Powells post decision press conference where he spoke at length about the strength of the US economy, and the cut was actually a recalibration of rates rather than due to underlying weakness. This resulted in longer term interest rates, think 10 to 30 years, actual rise rather than fall.
Alongside the rate decision, the Fed released its quarterly summary of economic projections. It included a revision higher in its unemployment forecast to 4.4% in 2024 and 2025, while the committee now expects a further 50 basis points of cuts this year.
Voiceover: What does the Fed decision mean for the RBNZ meeting in October?
Scott: Well, that’s the big question. It won’t necessarily affect what the RBNZ is going to do, but it does give committee members a free hit of sort to go for a 50 basis point cut without inflicting as much volatility on financial markets relative to if the Fed had opted for a 25 basis point cut themselves.
On the decision itself, interest rate markets are split between a 25 or a 50 basis point cut in the OCR. On one hand, a 50 basis point cut would be warranted, GDP for Q2 was negative and has been negative for 5 of the last 7 quarters, the job market continues to be weakened and Fed cut 50 basis points in a much stronger US economy.
On the other hand, the RBNZ signalled through its forecasts at the last monetary policy committee that there would be a gradual 25 basis point cut at each meeting for the remainder of the year, in order to move more aggressively the outlook for the economy would need to be worse than at the last meeting. The only major data point since the August meeting was GDP, which did fall to negative 0.2% however this was stronger than the RBNZ’s own forecast of negative 0.5%. Additionally, confidence surveys of consumers and businesses have actually risen following the RBNZ’s first cut suggesting a 50 basis point cut might not be warranted at this stage.
Voiceover: What should we be watching for in the near term?
Scott: Outside the RBNZ meeting on the 9th of October, we will get the latest inflation figures on the 16th. Which if there is a significant surprise to the downside, then we could see markets move to price in a greater rate cut in November than is currently expected.
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