Balancing caution with conviction

Key market movements

• Global equities extended their rally in July, returning 4.2% in un-hedged NZD terms and 2.2% NZD-hedged, supported by continued momentum in technology shares and growing investor confidence. The MSCI All Country World Index posted its third consecutive monthly gain, taking the 3-month return to 12.6% in un-hedged NZD terms.
• The New Zealand equity market continued to climb, with the S&P/NZX 50 Gross Index (including imputation credits) returning +1.8% for the month. Performance was underpinned by strength in utilities and consumer staples, while some cyclical names continued to lag amidst weak domestic data and cautious earnings guidance.
• Bond markets delivered mixed results in July. New Zealand bonds rose +0.6%, supported by stable monetary policy expectations and moderate issuance, while global bonds posted a marginal decline of -0.1%. US 10-year Treasury yields edged higher, ending the month at 4.37%, as markets digested fiscal developments and continued uncertainty around the timing of Federal Reserve rate cuts.

Key developments

Markets continued to navigate the evolving landscape of global tariffs, mixed economic data, and corporate earnings updates. US tariffs, though not as high as initially feared, are expected to settle at around 15%, still a significant rise from the 2.5% at the year's start, and are projected to dampen global growth to about 3% this year from 3.3% last. The Federal Reserve, cautious about tariff-driven inflation, kept rates on hold in July and signaled no imminent cuts, noting persistent inflation and uncertain economic conditions. However, a weaker-than-expected July jobs report prompted markets to increase expectations for Fed rate cuts this year.

Meanwhile, Congress passed Trump’s ambitious tax and spending bill, anticipated to boost near-term US growth but also raise concerns about a projected US$3.0 trillion increase in US debt over the next decade, according to the Congressional Budget Office – though some offset may come from tariff revenue. Market attention remains focused on how these shifts will impact underlying growth and inflation trends.

The New Zealand economy showed further signs of softness, with the Q2 QSBO revealing weaker pricing power and persistent spare capacity. The RBNZ held the OCR at 3.25% in July but reaffirmed an easing bias, setting the stage for further cuts. Inflation data for Q2 came in below expectations at 2.7%, and core inflation fell to a four-year low. These developments support the case for further monetary policy support, with the market beginning to price a lower terminal OCR of 2.50%.

In Australia, the RBA also paused but signalled an easing bias, even as loan growth and business sentiment remained resilient. Business credit expanded close to double-digit annual rates, and housing lending remained firm, helping to explain the relative economic strength across the Tasman.