Mar 2, 2023
The equity markets started the year very strong, and perhaps overly optimistic as they responded to the speed at which central banks may reverse tightening measures.
Recent weeks have been challenging for global and local share markets but this was on the back of exceptionally strong January returns. We did not believe these were sustainable given the probability that Central Banks would need to keep restrictive monetary policies in place for longer than the market was pricing. The higher-than-expected US inflation report coupled with strong labour and retail sales data acted to remind market participants of the potential risks. This saw US shares fall, interest rates rise and the US dollar strengthen. European markets bucked the trend given the mild winter seem to have mitigated some energy risks.
NZ markets track global markets and face the same issues. The NZ equity market experienced a smaller fall than others but this merely reflects its more defensive construction.
In terms of the economy the RBNZ like other central banks needs to reduce inflation expectations and with full employment needs to continue to raise the cost of funding via its Official Cash Rate (OCR). As expected this was raised 50 basis points from 4.25% to 4.75% and further increases will follow with the market now pricing in rates reaching ~5.50% later this year and rates expected to stay above 5% for some time.
While the impact on mortgage servicing costs is not immediate as fixed rate mortgages are refixed disposable incomes will be impacted by higher mortgage servicing costs. This and higher borrowing costs for businesses should then slow the economy and in particular retail and building sectors. The recent devastation from Cyclone Gabrielle could delay this as rebuilding adds economic demand however given the time taken to rebuild post the Canterbury earthquake or indeed similar devastating floods in Queensland a year ago this activity may be more protracted.
Still we remain positive on investment markets and highlight that investment returns tend to be better once inflation concerns \have been addressed.
|
Inflation |
Real S&P500 Return |
Real Inv Grade Bonds |
Balance Fund |
||||||
|
|
Fed Funds up |
Stable |
Down |
Fed Funds up |
Stable |
Down |
Fed Funds up |
Stable |
Down |
|
0.02-0.03 |
12.8% |
23.2% |
13.7% |
1.9% |
6.8% |
11.5% |
8% |
17% |
13% |
|
0.03-0.04 |
8.1% |
7.6% |
8.9% |
1.5% |
2.7% |
13.9% |
5% |
6% |
11% |
|
0.04-0.06 |
9.4% |
28.5% |
-0.2% |
1.2% |
-2.7% |
6.5% |
6% |
16% |
2% |
|
0.06-0.08 |
-7.0% |
20.2% |
-18.6% |
0.9% |
-7.6% |
1.4% |
-4% |
9% |
-11% |
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