Monthly Commentary | September 22

During August we saw markets reverse some of the gains experienced during July.  The exception to this was the NZ equity market which posted a positive return for August.  Overall, the general market dynamic remains in some tension between the desire for interest rates to push higher in order to crush demand and the inflationary pressures faced around the world, and the fact that the world needs to adjust to a lower growth, lower consumption period whilst supply side policies repair and improve the damage from border closures, lockdowns and the more recent disruptions from Russia’s invasion of Ukraine. 

Unsurprisingly, many economies are experiencing ‘inverted’ yield curves on their sovereign debt – in other words rates are higher at the shorter end (acknowledging higher policy rates to deal with inflation), and lower at the longer end (acknowledging the prospect of lower growth over time).  Whilst this state of affairs can persist for a considerable period of time, it is not particularly healthy for economies to operate in this way because it doesn’t encourage investors to provide longer term financing, and it’s a tacit admission that things will get worse economically before they get better. 

On the positive side, acknowledging a problem is the first step to solving it and nothing mentioned above is a surprise to markets and therefore there is a trajectory forward, but consumers (and that generally also means voters in the western democracies) will need to come to terms with the reality of being poorer relative to where they were before the COVID pandemic and war.