COMMENT: By Jenny Ruth
At first glance, record-low wholesale interest rate markets and soaring stocks appear to be occupying different universes.
In New Zealand, the five-year swap rate closed below 1.5 per cent for the first time, ending last week at 1.48 per cent, while the benchmark S&P/NZX 50 Index jumped 1.9 per cent, taking its gains year-to-date to 16.2 per cent.
But New Zealand isn't alone. Effectively, markets here have been playing follow-the-leader, the United States' market, where the benchmark S&P500 Index has risen more than 15 per cent so far this year while the 10-year Treasury bonds ended last week at 2.08 per cent. That's down from above 3.2 per cent last November.
A number of markets, including New Zealand's, Australia's and the US, are expecting central banks to be cutting their key rates in the next little while.
That's because of a combination of slowing growth in much of the developed world and worsening trade tensions that could push some or more economies into recession.
The interest rate markets in the US have now priced in 87 basis points worth of interest rate cuts in the next 12 months – that's three-and-a-half cuts, assuming the Federal Reserve moves 25 basis points a time.
The Fed will be publishing a monetary policy decision at 6am on Thursday, New Zealand time but Mark Lister, the head of wealth research at Craigs Investment Partners, says the markets see just a 21 per cent chance of a cut this week.
"A rate cut at the following meeting in late July is considered close to a certainty," Lister says.
"It's true that economic indicators have weakened, risks are rising and inflation remains subdued and this could indeed mean we see some modest easing from the Fed as insurance against a sharper downturn developing," he says.
But three-and-a-half cuts might be too optimistic.
"That would represent a Fed that is aggressively unwinding most of the moves we saw last year. If markets have got a little ahead of themselves, both bond and equity prices are probably undeserving of being at their current levels."
Lister says the year-to-date figures for the US stock market mask what has been a remarkably volatile period, "a real roller coaster."
After going through its worst quarter since 2011 in the December quarter last year, the S&P 500 jumped 17.5 per cent in the four months ended April, the strongest four-month increase since 1987.
And then in May, the S&P 500 fell 6.6 per cent, its worst May since 2010 and the second worst May since 1962.
While the New Zealand market hasn't been nearly as volatile, it has still been pulled around by the world's heavyweights. "Our market has followed with not quite so much volatility – we've gone along for the ride."
At least some of the buoyancy in equities markets is simply a rebound from a poor year in 2018, Lister says.
The S&P 500 had its worst December quarter in seven years and it was down 6.2 per cent for the full year. The NZX 50 was up 4.9 per cent, but that was all dividends – most other world indices don't include dividends.
Interest rate markets "are telling us growth in the future will be pretty subdued. Actually, that's putting it mildly – interest rates are telling us growth is going to be terrible."
For the moment, the equities markets are celebrating the impact of lower interest rates.
"Part of it is, where else do people go when interest rates are so low?" Lister says.
"Property has done its dash and we have falling house prices in Auckland so property's not sweeping up the free cash," he says.