Selected Market Indicators for Periods to 28 February 2023

Investor skepticism over intentions to fight inflation, led to a month of mostly declines in global share markets. At the beginning of the month, a labour department report showed that US payrolls increased by over half a million in January, nearly doubling December’s total. This subsequently ended five consecutive months of decelerating job growth.

Also adding to February’s series of poorly received economic data coming out of the US was a smaller than expected decline in headline inflation, a 53-year low in the unemployment rate, and a sharp increase in retail sales which indicated no apparent let-up in consumer spending. While this may seem like good news, it bears the cost of potentially longer lasting inflation and leaves investors facing the harsh reality of higher rates for longer.

After such a promising start to the year, market participants were reminded in February that the levels of heightened volatility experienced throughout 2022 may not be entirely behind us – especially if data signals on key economic indicators remain unclear.

Global equities declined in February as resilient economic data (particularly in the US labour market) led investors to reassess their expectations for both the peak in interest rates and the subsequent pace of rate cuts. Strong economic data drove bond yields higher in February as investors’ began to reduce their expectations for rate cuts by year-end. Front-end rates experienced the greatest leap, with the inversion of the 2-year and 10-year US Treasury yields deepening significantly towards month end. Higher US rates spilled over into local markets, with the Bloomberg NZ Bond 0+ Yr Composite Index reducing by 1.5% in February.

The impact of Cyclone Gabrielle was also factored into local yields climbing, with the expected cost of recovery likely to increase the pressure on pricing and potentially prolong the RBNZ’s monetary tightening regime. Global listed property and global listed infrastructure both underperformed global equities over the month, as soaring yields and sustained borrowing pressures weighed on the real estate sector. 

Significant developments for February included:

•  Data released in February showed that the Personal Consumption Expenditures (PCE) price index (the Fed’s preferred gauge of inflation) increased to an annual pace of 5.4% in January. The figures released in the PCE report are just the latest evidence that neither price increases nor the broader economy are cooling as much as expected.
• US-China relations made headlines in February after a US fighter pilot shot down a suspected Chinese spy balloon flying over North American air space. Chinese officials claimed the balloon was mainly used for meteorological purposes and unexpectedly drifted into US air space due to weather.
• The Reserve Bank of New Zealand (RBNZ) raised the official cash rate by 0.5% (50bps) to 4.75% in February, in line with market expectations. Some market participants had priced in a smaller increase in response to the devastating impact of recent weather events, however, the RBNZ stated “monetary policy is set with a medium-term focus, and the committee will look through these short-term output variations and direct price effects”.