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Chapter 1: What is the main topic discussed in this episode?
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Welcome to On Point, I'm Mark Lister, Investment Director at Craig's Investment Partners and I'll be talking about a range of topics including economics, portfolio strategy, investor education and anything else that's happening out there in financial markets.
Last weekend's news of a potential deal between Iran and the US could not have come soon enough. The conflict had gone on for 15 weeks, much longer than we all initially expected and certainly hoped. This had really raised the stakes for the inflation outlook and it had threatened to force the hand of central banks and make 2026 a really challenging year.
Now, it still looks a little bit shaky, but there is definitely hope that we might be able to avoid some of the more dire scenarios. And that might also mean that our Reserve Bank here in New Zealand won't have to do quite as much as many feared to rein inflation in. Markets have reacted positively to the news from last weekend. We've seen oil fall almost 30% from last month's peak.
It was $107, $108 at one point last month. Now it's down below $80. Global share markets have pushed higher and odds for hikes in the official cash rate, the OCR, have fallen back a little bit.
Earlier this month, financial markets saw about a 90% chance of the first OCR hike this cycle coming in early July, that's next month, while a total of three 25 basis point moves were expected before the end of this year. That would have seen the OCR finish this year at 3%. Today, it is at 2.25%. Now, a move up is still expected in July, but markets are much less confident.
Odds pulled back to below 70% at one point last week, and just two 25 basis point increases this year might now be more likely. We've seen a similar reaction across wholesale interest rate markets over the last 10 days or so, and this has a bearing on mortgage rates too.
New Zealand's five-year swap rate, which is a wholesale market interest rate, hit over 4.2% back in March when the conflict first broke out. That was the highest we'd seen since the middle of 2024, and it was a big move up from 3.5% in late February before the conflict started.
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Chapter 2: What recent events are influencing central banks?
The central banking landscape has also been shifting overseas. Last week we saw the Federal Reserve in the US enter a new era with Kevin Walsh as chair. There was some tough talk in his first press conference and Walsh definitely looks set to overhaul many aspects of how the Fed operates, communicates and makes decisions. Now some of this is long overdue.
I actually liked what I saw from Walsh last week and it should make for a more credible institution in the years ahead. Some investors might have glossed over some of that in their haste to go straight to the so-called dot plot of individual member forecasts.
Walsh has never been a fan of the dot plot, so he actually didn't submit a forecast himself, and that might have actually undermined the value of everyone else's dot, and I think it's an indication that the Fed will move away from that sort of communication method.
Markets see a rate hike now as early as September in the US, with odds moving in the opposite direction to what we've seen here in New Zealand. That is totally understandable, with US inflation now in the fours, but that recent retrenchment in oil prices we've talked about should see this fall back in the months ahead.
So you've got a few different balls up in the air across the central banking world, and change is definitely afoot. We will get a really useful sense check in about a fortnight's time from Reserve Bank Governor Dr Anna Bremen and her colleagues, while the next evolution of the Fed will be a longer-term theme to monitor. Thanks for listening, team. We'll talk again soon. Enjoy your week.
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