After a quiet May, several global equity markets resumed their move higher in June. They were, buoyed by ongoing declines in rates of inflation, raising hopes that the global economy can navigate current challenges and avoid a sharp slowdown. In June, the S&P 500 Index reached its highest level in more than a year, while the NASDAQ 100 Index continued its stellar performance, and was on track for its fourth successive month of gains, helped in part by ongoing strength from the mega-cap companies.
Closer to home, the NZX 50 Index continued its underperformance as economic data showed the country entered a technical recession earlier in the year.
With central banks still front and centre it makes July a busy month, with a plethora of central bank meetings. Breaking down what we expect from several of these meetings is ANZ Investments’ Month Ahead.
The Fed is expected to resume interest rate hikes
After hitting the pause button in June, the US Federal Reserve (the Fed) is widely tipped to resume its interest rate hiking cycle, as inflation, while trending much lower, remains above its 2% target. The pause in June was largely to buy itself some time – monetary policy operates with a lag and the pause would allow the central bank to collect more economic data. “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy”, it said.
Reinforcing the likelihood of another 25 basis point hike is that economic data since June’s pause has been on the stronger side; housing data was on the strong side, with the number of new homes being built rising 21.7% from the month prior, consumer sentiment data improved and retail sales rebounded. As at 25 June, interest rate markets are pricing in about a 75% chance of a 25 basis point hike, which would take the fed funds rate to 5.50%. The Fed meeting takes place on 26 July.
RBNZ to pause amid slowing economy; inflation data the focus
In New Zealand, the Reserve Bank of New Zealand (RBNZ) is expected to leave the Official Cash Rate (OCR) unchanged at 5.50%. At its May meeting, the Committee made it clear that 5.50% would be the terminal rate – the rate where the OCR would peak.
And since the May meeting, economic data has only confirmed that it is time for the RBNZ to hit pause. Primarily, it was the news that the economy entered a technical recession earlier this year when GDP fell 0.1% in the first quarter, following a 0.7% decline in the final quarter of 2022. A technical recession is defined by two consecutive quarterly declines in growth.
Although the interest rate decision appears to be a foregone conclusion, some economic data in July will garner our attention, notably inflation, where it is expected the annual pace of inflation will have dropped to about 6% for the second quarter, down from 6.7% in the quarter prior. With the economy in a recession and consumer demand waning (retail sales figures continue to underwhelm), it would take a significantly higher inflation print to bring interest rate hikes back to the table.
RBA to remain hawkish – but an interest rate hike is a close call
On 4 July, the Reserve Bank of Australia (RBA) meets where a decision whether or not to lift its key interest rate is up in the air. The RBA has been somewhat more patient with its monetary policy tightening compared to many of its global counterparts, having started its policy tightening later (May 2022), lifted interest rates in smaller increments (no 75 basis point hikes), and including a pause in April this year.
However, its decision-making board is facing conflicting issues, evident in the minutes of the June meeting, where it said the decision to raise interest rates was “finely balanced”. On one hand, the labour market remains red hot, with the economy adding more than 75,000 jobs in May, while the unemployment rate edged lower to 3.6% and the participation rate climbed to an all-time high.
On the other hand, the RBA remains attuned to the impact of the cumulative interest rate hikes and the fact monetary policy acts with a lag. “In taking the decision to increase interest rates again, members acknowledged the considerable uncertainty regarding the outlook for household spending and the financial stresses facing some households”, the minutes showed.
As at 26 June, interest rate markets are pricing in about a 40% chance of a 25 basis point hike. Hike or not, the board is likely to remain hawkish given elevated inflation and a resilient employment market.