Lower and lower domestic interest rates

Global markets continued their rally in July with the MSCI World index (in local currency) returning 1.2%. Markets were buoyed early in the month due to a positive result from the G20 talks between Presidents Xi and Trump. The market welcomed the agreement to postpone further tariffs (the postponement didn’t last long) and keep the lines of communication open. This, coupled with a better than expected earnings season, kept sentiment relatively upbeat. The market impact of Trump’s new tariffs and China’s retaliation were captured after the end of the month.

The New Zealand and Australian share markets both outperformed their global peers, up 3.4% and 2.9% (in AUD) respectively. Strong performance from the S&P/NZX 50’s largest constituent, a2 Milk (up 22.8%), contributed the lion’s share of the overall index return. The Australian market has benefitted from the tailwinds of higher iron ore prices, a more stable political landscape and green shoots appearing in the domestic housing market.

The Fed was never far from the news in July, though ultimately disappointed the market at the end of July with its 25-basis points rate cut (markets had priced in a 20% chance of a larger cut) and its less dovish outlook. This led to some upward repricing of longer-term rate expectations, which is perhaps not unwarranted given the recent flow of economic data including payrolls, inflation and durable goods from the US has, in aggregate, surprised to the upside in recent weeks.

Domestically, the pricing in of lower interest rates continued in July with little good news to stand in the way of the bond market rally. July saw the release of two business confidence surveys, both of which painted the picture of a slowing domestic economy. The NZIER QSBO survey reported its lowest business confidence read since 2009, while the ANZ quarterly Business Outlook Survey pointed to some future weakness in the otherwise strong labour market. This helped pave the way for the surprise 50bp OCR cut in August.