Financial markets have been impacted by two main concerns recently, resulting in subdued investor risk appetite. First, US bond yields have experienced a period of high volatility. Secondly, there are ongoing concerns that the conflict between Israel and Hamas may spread and become a broader regional problem.
US Treasury yields had been driven higher by better-than-expected economic news, challenging the narrative that the US economy is slowing down. The US 10-year Treasury yield briefly crossed the 5% mark, a level not seen since 2007. Various indicators continued to signal the resilience of the US economy, including robust retail sales and new home sales. The surge in bond yields also cast a shadow on equity markets through October, negatively impacting company valuations.
Geopolitical tensions are again in the spotlight as the Israel-Hamas conflict continues. Thus far, there has been limited impact on financial markets after an initial flight to safety. However, risks remain with the potential for the conflict to widen into other regions, escalating uncertainty in markets and impacting commodities particularly. Unrest in the Middle East, a strategically important area for energy markets, has the potential to significantly disrupt global oil supply.
While concerns around China’s economy remain, there have been promising signs as third-quarter growth exceeded expectations. GDP expanded at a 4.9% annual rate, indicating the economy may have reached a bottom, with incremental stimulus measures proving effective. Data revealed increased spending across all major categories, helping offset the drag caused by the property slowdown. However, issues in the real estate sector persist, as a major property developer, Country Garden, has defaulted on its debt by failing to make a US dollar bond repayment for the first time. New Zealand will be hoping for further support measures from the Chinese Government to stimulate the economy of our largest trading partner.
On a positive note, New Zealand’s third-quarter inflation result indicated it’s moving in the right direction. The consumers price index (CPI) was 5.6% in the year to September, notably lower than the Reserve Bank of New Zealand’s (RBNZ) estimate of 6.0%. Key core inflation measures conveyed a picture of reducing underlying inflationary pressure. While the CPI is well above the target range of 1 – 3%, the direction will be pleasing for the RBNZ.
In other domestic news, there are clear signs that labour market tightness is reducing. The unemployment rate rose to 3.9% in the third quarter, according to the latest Household Labour Force Survey. Unemployment is now at its highest rate in two years, and importantly above forecasts provided by the RBNZ. The data supports its “neutral” policy stance, believing it has tightened enough in the current cycle.
The combination of reduced risk appetite and higher bond yields led to a third straight monthly decline in October for both equity and bond markets. However, an on-hold decision at the latest US Federal Reserve (Fed) meeting saw a substantial pullback in yields. Fed Chair, Jerome Powell, hinted the US central bank may now be finished with its aggressive rate-hiking cycle. The dovish tone was cheered by global markets, which traded strongly in the aftermath of the meeting.
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