Global equity markets have had a good start to the year as inflation slowed in some countries, while labour markets remained strong raising hopes that central banks can engineer a soft landing for the economy. In the US, equity markets rose as much as 10% year-to-date, while in Europe, the UK’s FTSE 100 rose to an all-time high.
In New Zealand, it was a little more subdued as investors took stock of the catastrophe – both social and economic – left behind by Cyclone Gabrielle. As the situation unfolds, it would be remiss not to mention the social impact on those affected; loss of life, livelihood, friends and family – our thoughts go out to you all.
Looking ahead, it’s a busy period with more central banks set to raise interest rates in March – although the pace of hikes may be slowing for some. While many interest rate hikes are fully priced in, meaning the market is expecting the rate rise, there will be a focus on rhetoric and accompanying information from each central bank.
Breaking this down is ANZ Investments’ Month Ahead.
Fed set for another 25 basis point hike – all eyes on economic projections
The Fed meets late in March where it is expected to deliver a 25 basis point hike, as it slows the pace of policy tightening. Still, a 25 basis point hike would take the fed funds rate to its highest level in about 15 years putting further pressure on borrowing costs.
Although market pricing suggests a 25 basis point hike is a done deal, two regional Fed policymakers, Cleveland Fed President Loretta Mester and St. Louis Fed Chair James Bullard, both recently said they saw evidence for a 50 basis point hike at January’s meeting, as well as the upcoming March meeting (it is worth noting that both Mester and Bullard do not have a vote on the Federal Open Market Committee (FOMC) this year).
However, interest rate decision aside, the focal point of the meeting will be the accompanying update of the Committee’s economic projections – their forecasts on key economic metrics, which include GDP, inflation, employment, and the path of the fed funds rate.
These projections will help clarify whether or not the Fed believes it can engineer a soft landing – this is where, over the coming six to 12 months, inflation can revert back towards a more manageable level without a significant downturn in growth or rise in unemployment.
Elsewhere, we expect a 50 basis point interest rate hike from the European Central Bank (ECB), while the Reserve Bank of Australia (RBA) is expected to raise its policy rate by a smaller 25 basis points.
New Zealand: Assessing the economic impact of Cyclone Gabrielle
Now two weeks on from the tragedy of Cyclone Gabrielle, the government and policymakers will begin to assess the cost and plan for the rebuild that will have a wide impact on several facets of the domestic economy.
Firstly, to our clients, their friends and families who have been impacted – we are thinking of you. We can’t begin to understand what you have been through.
Regarding the economic implications, although early – the impact on the New Zealand economy looks sizeable. Finance Minister Grant Robertson tentatively said the cost would be in the region of $13 billion – similar to that of the Canterbury earthquakes.
At a macroeconomic level, the rebuild is likely to be inflationary, as materials and the labour required for the work are in short supply. Meanwhile, the hit to the food crops from the regions is likely to add upward pressure on food bills.
And finally, the extensive insurance claims are likely to see premiums rise across the board, further stretching households’ budgets.
A busy start to the year in fixed interest markets
With a central bank heavy period to begin the year, it has been a volatile start for fixed interest markets. On the whole, after a good January, we have seen global bonds give up some of their year-to-date gains over the past few weeks as some hawkish comments from central bankers suggest interest rates may have to stay higher for longer.
Closer to home, the outlook for fixed interest is uncertain with the cost and economic implications of Cyclone Gabrielle still being assessed. As expected, the Reserve Bank of New Zealand (RBNZ) lifted the Official Cash Rate (OCR) by 50 basis points, reaffirming that it is too early to accurately assess policy implications.
We have recently moved overweight to international bonds believing that the recent sell-off after Fed meeting was a little overdone, while in New Zealand we remain slightly overweight to domestic bonds given the sharp move in yields and relative attractiveness of New Zealand bonds compared to global bonds.