Market Snapshot


At the end of last year, a striking divergence unfolded — one that set the robustness of the United States (US) economy against the rest of the world. The US economy remained resilient, despite the Federal Reserve’s (Fed’s) efforts to slow the economy and thereby curb inflation by raising interest rates. Its economic engines, unimpeded by rate hikes, continued to push forward, while other economies remained stuck in neutral or going backwards.

The consensus was that bringing US inflation down to more sustainable levels would necessitate pushing the economy into recession in 2023, triggered by aggressive rate hikes and a subsequent rise in unemployment. Contrary to expectations, the US continued its path of growth – unemployment remained low, while at the same time cost pressures eased, leading to a decline in inflation from its mid-2022 peak. Initially the pace of disinflation defied expectations, boosting investor confidence. Optimism rose around the likelihood that the Fed would start cutting cash rates, sparking a rally in equities. This combined with enthusiasm for and anticipation of productivity gains from artificial intelligence resulted in particularly strong gains from stocks, particularly tech giants.

However, cracks have recently appeared in the scenario of resilient growth and ongoing disinflation. While inflation has improved considerably, it remains stubbornly above the Fed’s 2% target, and the path back appears more protracted than initially envisioned. Consequently, market expectations for rate cuts throughout 2024 have been pared back. Back in November, analysts foresaw six rate cuts, but today only one or two are anticipated by year-end. This adjustment has pushed the US 10-year Treasury yield up over 0.7% since the beginning of the year. As a result, the fervour of the artificial intelligence led rally has cooled, with a greater divergence in performance appearing between those companies that met earnings expectations and those that didn’t.

Meanwhile, signs are emerging that high cash rates are finally applying the brakes on the US economy. Growth momentum appears to be waning, with data generally falling short of expectations. Credit card and auto loan defaults are on the rise, and the job market, while still relatively strong, is gradually weakening. Consumer sentiment, factory orders, and business confidence also point to this shift. As the Fed focuses on controlling inflation, the longer cash rates will be maintained at current levels, and the risk of recession increases.

New Zealand’s economy is telling quite a different story. Despite substantial support from immigration, it’s in a shallow recession. On a per capita basis, the economy appears even more subdued. While still relatively low, unemployment has climbed to 4.3%. High cash rates are adding to financial stress for some households; this is reflected in rising mortgage arrears and record-high KiwiSaver hardship withdrawal applications. Like the Fed, the Reserve Bank of New Zealand (RBNZ) needs further confirmation that inflation is on track to return to its own target range of 1–3%. The latest inflation data showed a fall to 4.0% over the year to March 2024, so while significant progress has been made in bringing inflation down in New Zealand, we are not there yet.

In the near term, the trajectory of financial markets is uncertain, and likely to be shaped by shifting expectations regarding the timing and extent of central bank’s cash rate reductions. These adjustments hinge on the speed at which inflation data provides sufficient leeway for initiating these cuts. The countdown is underway to generate a soft landing in the US, with the impact of higher cash rates likely to be increasingly felt as time goes on. In any case, the longer-term outlook for fixed interest and equities remains positive, and both will no doubt be boosted when rate cuts do finally arrive.

This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else.