International equity markets were generally higher to begin February, initially shrugging off inflation concerns, while it appeared geopolitical tensions were easing. However, late in February, inflation worries exacerbated, which saw equity markets in the US and Europe retreat, while geopolitical unrest grew. Meanwhile, Asian markets were more mixed with Japan’s market underperforming, while China’s Shanghai Composite Index was on track to finish the month higher.
Down under, New Zealand markets were a little more subdued, especially leading up to the Reserve Bank of New Zealand (RBNZ) meeting, where it delivered a 50 basis point cut to the Official Cash Rate (OCR).
Looking ahead to March, several global central banks are set to meet, with the US Federal Reserve (the Fed) the key one, while in Europe, the Bank of England (BoE) and European Central Bank (ECB) also make decisions on interest rates. Breaking this down, and more, here’s ANZ Investments’ Month Ahead for March.
Fed to hold rates steady – but forward guidance will be closely watched
After cuts by the RBNZ and the Reserve Bank of Australia (RBA) in February, all eyes turn to the US this March, where the Fed is widely expected to leave the fed funds target rate unchanged at 4.25% - 4.50%.
After 100 basis points of cuts in 2024, the Fed has taken a more cautious approach on interest rates. This is largely a result of worries that inflation rates are flatlining above the Fed’s target rate, while the global tit-for-tat on tariffs could exacerbate pricing pressures – and potentially weigh on growth.
Although a rate cut is highly unlikely, the meeting is accompanied by the Summary of Economic Projections (SEP) – a quarterly update of Fed officials’ projections of key economic indicators, including interest rates, employment and inflation. And with the earlier-mentioned worries around inflation, coupled with geopolitical unrest, these updates are likely to shape the medium to long-term outlook for monetary policy.
ECB set to cut; BoE to hold steady
While the Fed is expected to leave interest rates unchanged, the ECB is set to cut its key interest rates this March, with a 25 basis point cut almost fully priced in. Nevertheless, after five cuts since June of last year, there are signs that a pause might be on the horizon. ECB board member Isabel Schnabel recently made comments that rates are no longer restrictive and added that energy prices could pose upside risks to inflation.
Meanwhile, the BoE is set to leave its key interest rate unchanged. The central bank there finds itself in a bit of a bind, where growth remains tepid, but inflation, notably wage inflation, remains uncomfortably high and is not showing any signs of slowing. According to the Office for National Statistics (ONS), average earnings for regular wages, excluding bonuses, rose 5.9% on an annual basis for the period October to December 2024.
New Zealand Q4 2024 GDP data – has the economy bottomed?
At a domestic level, key economic data this month centres on the Q4 2024 GDP (gross domestic product) report. After a worse-than-expected Q3 result, hopes are that the economy is starting to climb its way out of recession.
At a sector level, construction continues to struggle, feeling the pinch of higher interest rates. However, hopes are that the sector is starting to benefit from the interest rate cuts over the past several months.
We remain neutral – assessing several risks
At a tactical level, we began 2025 on a similar note to the latter part of 2024, maintaining neutral positions across global equities, global bonds and domestic bonds. Our neutral position across global equities reflects several competing narratives. On the one hand, equity market valuations are stretched, while momentum indicators continue to suggest there could be further upside. In fixed interest markets, we feel global bonds are fairly priced at current levels, given the balance of mixed economic data, labour market strength and a likely moderation in US rate cuts.
Moreover, we are seeing a global tit-for-tat on tariffs, which could pose upside risks to inflation, while on the other hand, they could also weigh on global growth.