Keep an eye on New Zealand as the lead indicator

In this week’s video insight, I delve into the discussions surrounding the Reserve Bank of New Zealand’s proactive approach to inflation, the nuanced shifts in major economies, and the potential impacts of tightening monetary policies.


Hello, I’m David Buckland and welcome to this week’s video insight.

The Reserve Bank of New Zealand, the first English-speaking Central Bank to jump on the higher interest rate tightening bandwagon, take their 1 per cent to 3 per cent inflation target very seriously. Their tightening cycle commenced in October 2021, well ahead of their English-speaking counterparts. 

After peaking at 7.3 per cent in the year to June 2022, and following 12 official cash rate increases to 5.50 per cent, the New Zealand inflation rate has come down to 5.6 per cent in the year to September 2023, but still well above their target.

Of the five major English-speaking Central Banks, there have been an average of 12 tightenings to over 5.0 per cent typically over about the last 20 months. Is a large deterioration in the labour market required for Central Banks to hit their inflation targets later in 2024?

From a global context, 2023 started with low and declining expectations for global growth and elevated fears of an onset of a recession. However, China’s reopening, large fiscal stimulus in the U.S. and Europe, and residual strength of U.S. consumers stabilized growth.

From a U.S. perspective, we experienced market optimism from ChatGPT, the Magnificent 7, and more recent expectations the U.S. Federal Reserve will cut their cash rate in the later part of 2024. This resulted in a very sharp share market and bond market rally in November, resulting in one of the best 60/40 portfolio performances in the last three decades. And this was despite major wars, recession in parts of the Eurozone, and early signs of credit and consumer deterioration in the U.S.

Indications are that 80 per cent of U.S. consumers have depleted their excess savings from the COVID era and, by mid-2024, it seems likely relatively few consumers will be better off than before the pandemic. There are increasing signs of stress in associated with the credit card and auto loan delinquencies. Fortunately, U.S. residential mortgages are enjoying the benefit of generally locking in low interest rates.

Although it has become consensus thinking that a recession will be avoided, the official cash rate tightening shock could negatively impact economic activity. Regardless of whether there’s a recession or not, investors should consider weighing part of their portfolio towards the reliable monthly income produced from our high yield credit offerings.

Central bank rhetoric will need to maintain a tightening bias given the upward pressure on labour costs and service prices. Getting inflation down towards the 2 per cent long-term target will not be easy, without a much softer labour market.


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