May 2019

Market Commentary

Times have changed. A year ago, consensus opinion was for rising rates. Yet interest rate markets are pricing in a significantly different forward path. Just a few months ago, the thought of rate cuts in the US or New Zealand seemed unlikely, yet here we are. The RBNZ cut the OCR in early May  to1.5%. The RBNZ rate cut (and those in the US) come at a time of historically tight employment markets and current GDP growth that is OK but not stellar. The obvious signal from interest rate policy is that either the economy is about to get a lot worse or that the RBNZ fears deflation. We think the latter is the real fear. In a deflationary environment, but one with good corporate profits and an earnings yield of between 4% and 8% depending on your market, it is no great surprise that stock markets remain near historic highs.

Bad News is Good News Again

The big story right now is not the trade war, but the Fed’s likely reaction to it – with Fed chair Powell recently hinting at the possibility of interest rate cuts if need be. It is once again a funny case of “bad news is good news”, as the recent weaker than expected employment report saw stocks lift on heightened rate cut hopes, with markets now pricing in an 80% chance of an interest rate cut by the US Federal Reserve as early as July.