Harbour Outlook: Escalating trade tensions impact markets
Key market movements
- Global equities were sharply lower in unhedged New Zealand dollar terms in March, with the MSCI All Country World Index (ACWI) declining 5.0%. With the NZD strengthening against the USD, returns in hedged terms were -4.5% for the month.
- Locally, the New Zealand equity market continued its poor start to the year with the S&P/NZX 50 Gross Index (including imputation credits) down 2.4% in March. Australian equities also struggled with the S&P/ASX 200 Index down 3.4% (-4.1% in NZD terms).
- NZ bond returns were positive in March (+0.2%), measured by the Bloomberg NZ Bond Composite 0+ Yr Index. Global bonds fared a little worse with the Bloomberg Global Aggregate Bond Index (hedged to NZD) falling a modest 0.5% with US 10-year Treasury yields flat for the month at 4.2%.
Key developments
In early April, the US announced more aggressive than expected increases in import tariffs, which incorporate a reciprocal tariff programme with a minimum 10% on all countries, including Australia and New Zealand. If tariffs are maintained at these newly announced levels, we expect them to lower already-decelerating US GDP growth and increase inflation pressures. Global growth is likely to fall because of this US weakness and as economies elsewhere experience reduced US demand for their exports to varying degrees.The Fed didn’t appear worried about tariffs in March, but these are likely much larger than it expected. It left rates unchanged at its March meeting, as widely expected, but indicated two more rate cuts this year. The Fed considered the inflation impact of tariffs to be largely "transitory" and described long-term inflation expectations as "well anchored", despite a decent pickup in the University of Michigan 5-year measure. While the member forecasts incorporated higher inflation and lower growth, Fed Chair Powell was at pains to emphasise that the economy remained in good shape.
US tariffs on European imports were increased 20% but there is likely to be a partial offset for growth from greater German government spending. In mid-March, Germany announced a relaxation of its strict debt rules to allow more defence and infrastructure spending. It would allow defence spending above 1% of GDP to be exempt from Germany's debt brake that is designed to limit borrowing and keep the structural fiscal deficit at 0.35% of GDP. The deal also includes the creation of a 10-year, EUR500bn infrastructure fund. Other European countries have also indicated appetite to increase defence spending, but not all have the fiscal room to do so.
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