Axiome March update 2019

In response to the mauling markets received in the December quarter, and concerns around flagging global growth, the US Federal Reserve changed its mind that US interest rates need to head higher.

Instead, it put monetary policy on hold and signaled that future rate increases are likely to be smaller than had been expected.  In New Zealand, the RBNZ also changed its tune in its March economic update to signal that the next move in interest rates could be a cut.

Markets have rallied strongly in response to these developments so far this year across all risk assets, including government and corporate bonds, property and infrastructure stocks, and equities.  This rally has largely erased paper losses that investors experienced in December, and some markets, including the NZ equity market, are now at an all-time high.

On the flip-side, long term interest rates are back near historic lows (see Figure 2 re mortgage rates), with New Zealand 10-year Treasury rates at an all-time low of around 1.75%.

The rally in markets was not just due to central banks easing monetary conditions.  As discussed in our last update, the size of the decline in December meant that markets had become better value for investors and while we did not necessarily expect such a strong bounce back, a recovery of some sort is not surprising. Additional good news came with trade tensions easing and the Trump administration holding off on threatened higher tariffs on Chinese exports.