Business & Investing: The kiwi dollar is hit as the greenback rises after an apparent change of stance on interest rate hikes by the US Federal Reserve

The US Federal Reserve took investors by surprise last week bringing forward by a year the expected start of interest rate hikes, sending global markets tumbling.

After previously providing assurances that rate hikes would not begin until 2024 at the earliest, the Fed unexpectedly changed its policy stance in the wake of increasingly positive economic data on the US economy. It signalled it could now raise rates at least twice in 2023.

While that’s still at least 18 months away, Fed chair Jerome Powell sought to reassure the market cautioning that discussions about raising rates would be “highly premature.” However, investors took fright at the news, particularly after one Fed voting member told business television network CNBC rate rises could begin as soon as late next year.

While the NZ market ended the week relatively unscathed after a better than expected GDP result for the March quarter left the NZX50 virtually unchanged, investors will be expecting some weakness today after US markets closed sharply lower on Friday.

Despite hitting an all-time high last week of 4257, the S&P500 ended the week down 1.9 percent at 4166, its biggest 5-day decline since February. It fell 1.3 percent on Friday, closing near its low for the session, indicating more selling could be on the way this week.

Investors will also be keeping a close eye on the benchmark index this week to see if it can hold above its 60-day moving average at 4150. If it breaches this level it’s likely further downside selling pressure will occur.

The change in the Fed’s monetary policy stance also sent the US dollar surging and the kiwi dollar plunging.

The US dollar index gained 2 percent for the week, its biggest weekly rise since March last year, while the NZ dollar fell 2.6 percent for the week to a 7-month low of 69.4 US cents.

While the weaker currency will be welcomed by exporters such as F&P Healthcare and Sanford, petrol prices and the cost of imports are now likely to begin rising in coming months, adding to already growing inflationary pressures.

Gold also recorded its biggest weekly decline since March 2020 shedding almost US$100 in just 24 hours last week. The precious metal ended the week down 6 percent at US$1767, a 7-week low, weighed down by concerns over tighter US monetary policy, which is negative for gold.

Oil prices continued to push higher with Brent Crude futures gaining a further 0.8 percent last week closing at US$73.22 a barrel, its highest close since October 2018. This time last year oil was trading at US$41 a barrel.

The yield on the benchmark 10-year US Treasury bond, which moves inversely to its price, was almost 1 percent lower for the week at 1.44 percent.

One bright spot locally was a strong rebound in a2 Milk’s shares which gained 10.2 percent, its best weekly performance in more than a year. More than 6 million shares changed hands on Friday, its biggest one day volume spike since announcing its earnings downgrade last month.

Week in Review

Gross Domestic Product (GDP) for the March quarter expanded by a surprising 1.6 percent after shrinking 1 percent in the December quarter. Economists had tipped the economy to grow between 0.5 percent and 0.8 percent while the Reserve Bank’s most recent forecast had been for a contraction of 0.6 percent. Services industries, which make up about two-thirds of New Zealand’s economy, made the largest contribution to the result with increases in spending on accommodation, eating out, as well as purchases of furniture, audio-visual equipment and motor vehicles. While GDP rose in the March quarter, on an average annual basis it fell 2.3 percent in the year ended March.

NZ’s current account deficit, seasonally adjusted, widened to $5 billion in the March 2021 quarter. Statistics NZ said before the March 2021 quarter, the largest deficit reported was $4.3b in the June 2008 quarter during the global financial crisis. For the first time since the March 2020 quarter, the value of imported goods was larger than the value of exported goods. This resulted in a goods deficit of $1.5b.

Debt-to-income ratios look set to become a reality after the Reserve Bank was granted powers to impose the controversial restriction on non first-home buyers by finance minister Grant Robertson. The RBNZ has long sought to limit bank lending on housing relative to incomes which will now be added to its existing loan-to-valuation ratio restrictions (LVRs) designed to curb riskier lending by banks.

The Reserve Bank confirmed it had finalised new bank capital rules it had previously announced in December 2019. Some of the changes will be phased in from October this year while the increases in capital will be phased in over seven years starting from July next year. The prudential regulator postponed the start date of the phase-in by a year due to the Covid-19 pandemic. Deputy governor and head of financial stability Geoff Bascand said that in response to feedback from banks, the RBNZ had improved the way the rules are structured to ensure they are more transparent and easier to follow.

Share investing rose sharply in the past year according to a survey conducted by CoreData for the Financial Services Council. The survey of 2,000 people in April found 30.2 percent of respondents owned NZ shares, up from 23.2 percent a year earlier, while 18.8 percent said they owned international shares. Use of digital platforms such as Sharesies, Hatch and Stake also increased markedly. Investment in managed funds rose only marginally to 17.6 percent from 17 percent a year earlier, while 9.5 percent of respondents said they owned cryptocurrencies, up from 3.1 percent 12 months ago.

House prices nationwide rose 29.8 percent in the year ended May according to the latest Real Estate Institute house price index. This compares to 26.8 percent for the year to April. NZIER acting chief executive Wendy Alexander said the latest figures indicate recent government and Reserve Bank intervention had done little to slow the pace of house price inflation. Activity was also strong with 7,550 houses sold, up from 7,453 in April.

Carter Holt Harvey, which had been facing a multimillion dollar class action brought by homeowners over its Shadowclad product, will receive more than half a million dollars paid to it in security for costs after a decision was made not to proceed with the action by the funder. The case, filed in 2018, involved more than 100 leaky building owners who had been seeking an estimated $40 million in damages. The case had been scheduled to start in May next year and was expected to run for more than 20 weeks in the Auckland High Court.

ASB Bank has admitted to responsible lending failures and has agreed with the Commerce Commission to repay customers $8.9 million. The commission said the bank admitted it failed to ensure its systems and processes were sufficient to ensure that required information was given to more than 73,000 home and personal loan customers when they made particular changes to their loans. The failure meant some customers had not been given information required by the Credit Contracts and Consumer Finance Act.

Ports of Auckland’s problem-plagued automated terminal operations were shut down last Wednesday night due to a software issue it said it had been unable to resolve, though it confirmed the problem had not resulted from an external cyber-attack. Last month, the port further delayed the full launch of its controversial automation project citing ongoing technical and safety assurance issues. In an advisory to customers, the port said it had been temporarily unable to deliver or receive containers via the automated truck grid, nor move containers in the automated yard.

Rocket Lab’s proposed listing on the US Nasdaq exchange has been delayed to the third quarter of this year. The locally founded US-registered aerospace company announced earlier this year plans to merge with the special purpose acquisition company (SPAC) Vector Acquisition Corporation and to list in the current quarter under the ticker symbol RKLB. When the merger was announced, it gave Rocket Lab an implied valuation of US$4.1 billion. Separately, Rocket Lab also announced it had been successful in winning a contract to design two of its Photon spacecraft for a mission to Mars. NASA will provide the commercial launch vehicle for a flight that will take 11 months to reach the red planet.

Penrich Global Macro Fund manager Kelly Tonkin pleaded guilty to four charges brought by the Serious Fraud Office (SFO) include false accounting, false statement by promoter and forgery. Each charge carries a maximum penalty of 10 years in prison. The SFO said Tonkin fraudulently concealed significant losses, estimated to be in excess of $100 million, as well as forging an auditors’ certificate in 2017 while continuing to solicit money for the fund which was placed into voluntary liquidation by its shareholders in April last year. The court heard the offending had affected 170 victims, most of them investors. Tonkin will be sentenced in September.

Sir Eion Edgar, who chaired Dunedin based investment firm Forsyth Barr from 1998 to 2018, died at his home in Queenstown last week aged 76. He joined the business in 1972 and was the company’s managing director through the 1990s. He also chaired the NZX, was chancellor at Otago University and was president of the NZ Olympic Committee. Edgar was made a knight in 2009 having previously received an order of merit for services to business and philanthropy.

Coming up this week…

Tues, 22nd – Credit Card spending (May) – RBNZ

Wed, 23rd – T&G Global AGM (virtual)

Thur, 24th – Oceania Healthcare AGM (Auckland), NZ Oil & Gas Shareholders Meeting

Fri, 25th – Me Today Shareholders Meeting, Overseas Trade (May), Residential Lending by borrower type and loan-to-valuation (May) – RBNZ

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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