Harbour Investment Outlook: Waiting game

Harbour Investment Outlook: Waiting game

Key market movements

• The MSCI All Country World Index (ACWI) increased 4.5% last month, in New Zealand dollar-unhedged terms. However, the strength was due entirely to NZD weakness with returns in NZD-hedged terms, coming in at -1.1% for October.
• Locally, New Zealand equity market returns picked up after a couple of flat months, with the S&P/NZX 50 Gross Index (including imputation credits) increasing 1.7%. The S&P/ASX 200 Index, however, pulled back 1.3% (-0.2% in NZD terms) after a strong September.
• Bond indices fell in October. The Bloomberg NZ Bond Composite 0+ Yr Index dropped 0.5%, whilst the Bloomberg Global Aggregate Bond Index (hedged to NZD) declined 1.5% over the month. US 10-year government bond yields were 50bps higher on the month, ending at 4.28%, whilst the New Zealand 10-year yield increased 24bps to end at 4.48%.

After a fantastic period of economic outperformance, the US may finally be slowing. US data through October showed ongoing service sector strength and, along with Trump’s rising popularity, prompted the market to lift the implied trough in the Fed Funds rate from below 3% to around 3.5%. Real-time GDP measures, however, suggest a slowing in growth this quarter to around 2%, from almost 3% in Q3. This seemed to be reflected by the October labour market report where payroll growth came in weaker than expected and there were negative revisions for the previous two months.

The jury remains out on the extent of Chinese stimulus with further fiscal measures key to deliver a meaningful growth improvement. While the announcements of lower interest rates and easier borrowing requirements are necessary to engineer a pickup in growth, they are probably not sufficient to deliver something meaningful. This falls to fiscal policy, for which only CNY2trn of stimulus has been announced, c. 1.5% of GDP. The most optimistic expectations remain for as much as another CNY8trn of stimulus, which would likely lift 2025 GDP growth by around 1 percentage point to almost 6%. We think the market base case is around another CNY3trn of stimulus.