Weekly market wrap up - 12 July 2024
While the Reserve Bank of New Zealand (RBNZ) surprised few with its confirmation to hold the Official Cash Rate (OCR) steady for the eighth consecutive meeting this week, markets did respond to a perceived shift in the central bank’s stance. The RBNZ’s tweaks to the wording within the statement accompanying its on-hold decision were viewed as confirmation that the Bank believed interest rate relief, by way of OCR reductions, could be delivered to the New Zealand economy sooner than previously suggested. The RBNZ’s current official guidance, presented in May, indicated that OCR lowering would commence in the latter part of 2025. This prompted many borrowers to adopt a “survive till ‘25” mantra. However, market pricing suggests the cash rate will fall in the latter part of 2024.
Regardless of market expectations, the evolution of data will ultimately determine the RBNZ’s actions.
The "last mile" of the US Federal Reserve's ('Fed') battle against inflation may have shortened. Data released overnight showed that consumer prices unexpectedly fell in June, boosting market confidence in a potential lowering of the base interest rate in the coming months. The consumer price index declined by 0.1% in June relative to May, marking the softest month-on-month reading since May 2020. Taking a step back to assess inflation from a year-on-year perspective, the 3.0% increase was the lowest recorded level since June 2021. The market responded to the encouraging data by elevating expectations that the Fed will move to lower its cash rate at the September meeting.
The Fed’s upcoming July meeting, additional inflation data releases, and speeches from Fed officials will all provide further fodder for forecasters as they project the potential path of US monetary policy.
Australian homeowners are becoming concerned that mortgage rates could increase, with these concerns chipping away at consumer confidence. Westpac’s latest consumer sentiment survey demonstrated a minor decline for July. While the headline reading and degree of decline were hardly panic-inspiring, a deeper look into the data revealed a surge in expectations for variable mortgage rates over the coming 12 months. Ongoing fears about inflation and potential further interest rate increases seem to be overshadowing the relief from recent tax cuts and government support. Almost 60% of respondents to the Westpac survey expect mortgage rates to rise over the next year.
While New Zealand homeowners hold out hope for a lowering of borrowing costs in the near term, households across the Tasman are bracing for a potential increase.
The past week saw the 75th meeting of the North Atlantic Treaty Organisation (‘NATO’). The meeting provides an opportunity for leaders of member countries to align in terms of direction for the organisation. With 32 meeting participants, collective agreement can be difficult to achieve. At the forefront of the agenda was the ongoing Russia-Ukraine conflict, and the bolstering of support for Ukraine was agreed upon by all. On the face of it, this is a positive outcome for Ukraine, though the NATO members are not legally bound to follow through with commitments. From a markets perspective, security concerns in Eastern Europe have a clearly demonstrated ability to impact global energy and food prices.
The amount of support that is ultimately delivered to Ukraine, indirectly influencing key global commodity prices, could be affected by the shifting political perspectives of NATO member nations.
Authors: Zoe McCane, Sam Duncan, Duncan Roff and Ganan Jeyakumar
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