Market Watch: Is the inflation war won? US investors think so

Could it be that global share markets have finally turned?

Here in New Zealand the Reserve Bank remains cautious and the local NZX50 remains subdued but United States markets are now betting the Federal Reserve’s next move will be a rate cut.

That’s seen equity and bond prices rally on Wall Street as yields fall.

The benchmark S&P 500 Index and tech-focused Nasdaq Composite Index are both up by almost 10 per cent since the start of October.

The Reserve Bank’s “hawkish turn” last week (which suggested no local rate cut until the middle of 2025) pushed back against that international optimism, Pie Funds founder and chief investment officer Mike Taylor said, talking on the Market Watch video show.

But whether the RBNZ could really hold rates that long wasn’t clear, he said.

“The starting point for us at the moment is that our core inflation is running higher than say the US or in Europe. Whereas here, you know, with inflation rates still in the mid-fives, it’s a bit hard to start saying that they’re looking at cuts next year.”

However, the big caveat was that if the global economy started to slow, we would see a local slowdown too, Taylor said.

“It would be unusual, to say the least, for other major central banks to be cutting and for us to be hiking or on hold,” he said.

But from a “signalling point of view” it probably made sense for the RBNZ to not take a backward step.

It was clear that the US economy was doing well now though, he said.

Positive signs in the most recent data showed people were still travelling and spending. Black Friday and Cyber Monday sales were up in the US on previous years.

That was now being reflected on the market, with several hot stocks leading the charge.

This year had been all about “the magnificent seven”, Taylor said.

That group is Alphabet (Google), Apple, Amazon, Meta (Facebook and Instagram), computer chip maker Nvidia, Tesla and Microsoft.

The Magnificent Seven and its stellar cast have inspired a moniker for the stocks driving most of this year's big Wall Street gains. Photo / LMPC via Getty Images

If you excluded those stocks and just looked at the remaining 493, the S&P 500 would basically be flat for the year, Taylor said.

“And if you look at other sectors such as small caps, they’re actually even down in 2023.”

That suggested people were buying growth stories again and there was optimism about the medium term, even though the companies exposed to the reality of the economy right now were still battling to retain earnings.

Mike Taylor is the founder and chief investment officer at Pie Funds.

Bond markets were also starting look optimistic about the future.

“About a month ago, we saw the US 10-year [treasury bond yield] touching 5 per cent a number of times and it was causing stress for financial markets.”

Since then a couple of famous hedge fund managers have been reported as saying they’d closed their position on short-term rates, which signalled a peak, Taylor said.

Since then there’d been even more good news on inflation in the US.

“As a consequence, November has been one of the best months for bonds since 2008.”

Until last week that optimism had been filtering through in New Zealand and we had even seen Westpac cut some mortgage rates.

That’s had a “bit of cold water poured on it” by the RBNZ last week, Taylor said.

The Market Watch video show is produced in partnership with Pie Funds.