Business & Investing: Wednesday’s Reserve Bank monetary policy statement could indicate an interest rates rise much earlier than previously predicted

The Reserve Bank will deliver its latest Monetary Policy Review on Wednesday without the benefit of Friday’s Consumer Price Index, which will answer a big question around how much cost pressures are building in the economy.

There has been plenty of speculation in recent weeks that the central bank might be forced to bring forward the first of its expected interest rate rises given the increasing strength of the economy, particularly a rampant property market that seemingly remains immune to previous cooling measures. ASB Bank is now forecasting a rate hike as early as November.

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Business optimism is also quickly gathering pace. The latest NZ Institute of Economic Research survey of business opinion showed a net 10 percent of businesses expect an improvement in the economic outlook on a seasonally adjusted basis – a turnaround from the net 8 percent of businesses who had expected a deterioration in the previous quarter.

The NZ dollar closed out the week at 69.95 US cents after falling 0.5 points last week. Any hint at an earlier than expected interest rate rise is sure to send it surging back above 70 US cents.

Renewed Covid worries

What the Reserve Bank will take into account is a growing resurgence of Covid-19 infections globally, particularly the rapidly escalating outbreak in New South Wales that has created a further setback for the struggling tourism sector which had been counting on the Australian school holidays for a much-needed revenue boost.

At the weekend, a top US Federal Reserve official warned the spread of the Delta coronavirus variant and low vaccination rates in some parts of the world pose a threat to the global recovery and urged caution in removing monetary support for the US economy.

Mary Daly, the president of the Federal Reserve Bank of San Francisco and a voting member of the Federal Open Market Committee, told the Financial Times one of the biggest risks to global growth going forward is that “we prematurely declare victory on Covid”.

Daly pointed to the struggles to contain the virus in Japan and other countries and said surging infections and lagging inoculation campaigns abroad were constraining the economic rebound and could have negative ramifications for the US economy.

NZ sharemarket mixed

The NZ sharemarket recorded its first negative weekly close since late May, falling 0.2 percent. Against the trend, a2 Milk shares continued their recent rebound gaining a further 8.5 percent last week. The previously out-of-favour stock is now up almost 40 percent from its low of $5.42 on May 19. No such luck, though, for My Food Bag shareholders after its shares fell to a new low of $1.31 last week. They remain almost 30 percent below their $1.85 issue price.

NZ Refining was the week’s best performing stock. Investors game enough to buy the shares at 41c back in March have almost doubled their money in less than six months after they hit 80c on Friday following plans for the existing refinery to become a fuel import terminal. Investment advisor Forsyth Barr lifted its price target for the shares to $1.10.

Tourism stocks including Auckland Airport and Air NZ are likely to weaken today as a result of the escalating New South Wales Covid-19 outbreak. New infections are expected to exceed 100 today –  further extending the state’s current lockdown and prolonging the suspension of the trans-Tasman travel bubble.

Bond yield tumble

The big talking point of last week was the plunge in the benchmark 10 year US treasury yield which suffered its biggest weekly fall since November, sliding 7.6 percent to 1.36 percent as inflationary fears continued to ease. The move pushed US stocks once again into record territory with the S&P500 ending the week at 4370 up 0.4 percent, as US markets continue to grind higher.

On commodity markets, oil prices eased last week for the first time since mid-May with Brent Crude futures falling 0.7 percent to US$75.56 a barrel, while gold prices rose for a third week to US$1808 an ounce.

Bitcoin fell almost 5 percent last week to US$33,600, its lowest weekly close since January.

Week in review

The NZ Institute of Economic Research (NZIER) released its latest Quarterly Survey of Business Opinion showing a sharp improvement in both business confidence and demand in firms’ own business. While a net 10 percent of businesses expect an improvement in the economic outlook on a seasonally adjusted basis, firms’ own trading activity also picked up strongly, with a net 26 percent of businesses reporting increased demand in the June quarter.

NZIER also found construction demand is boosting confidence in the building sector, with a strong pipeline of residential, commercial and government construction work over the coming year. However, against this backdrop it also found capacity pressures are becoming more acute in the sector. Nonetheless, profitability in the building sector is the strongest since December 2002, reflecting the greater ease with which firms are passing on the increased costs by raising prices.

Conditions in other sectors are more mixed, with service sector firms feeling more positive but manufacturers and retailers feeling downbeat. A net 15 percent of firms increased headcount in the June quarter, while a net 20 percent are looking to increase investment in plant and machinery over the coming year.

Cannasouth is hoping to raise $6 million to buy out its joint venture manufacturing and cultivation partners. The Hamilton-based medicinal cannabis company said it had entered into conditional agreements to acquire the outstanding 50 percent in its cultivation operation and 40 percent of Midwest Pharmaceuticals, for $3.5m and $1m respectively. The remaining funds from new capital raised will be funneled into spending on marketing for export flower sales into its target markets of Israel, Germany and Australia, and new product development.

The Overseas Investment Office has given its approval for a2 Milk to acquire a 75 percent interest in Southland-based Mataura Valley Milk. Late last year a2 Milk announced it would buy the stake for $268.5 million, based on an enterprise value of about $385m. It also expects to invest around $120m over the first two-to-three years. Completion of the transaction is likely to occur later this month. The move will allow a2 Milk to participate in nutritional products manufacturing which is expected to strengthen its offering in its key China market.

Pushpay chief financial officer Shane Sampson is set to move to online travel booking and expense management company Serko in October. Pushpay said it had started an executive search to replace Sampson. Pushpay CEO Molly Matthews said during his six-year tenure at Pushpay Sampson had been instrumental in driving the increased sophistication of the company’s financial reporting and the scaling of its finance operations across the US and New Zealand.

Westpac is set to sell its New Zealand life insurance business for $400 million to Fidelity Life, the NZ Superannuation Fund, as well as new investor Ngāi Tahu Holdings. The sale is the latest in a series of transactions by the major Australian-owned banks to shed non-banking operations. The move follows criticism by Australia’s royal commission into financial institutions and a recommendation they simplify their core operations. Westpac NZ’s acting CEO, Simon Power, said Westpac would form a 15-year alliance with Fidelity to sell its life policies to Westpac customers.

Global dairy prices fell 3.6 percent in last week’s auction, marking the sixth consecutive fall in the Global Dairy Trade (GDT) price index. Average prices are now US$3,924 a metric tonne, with whole milk powder falling 3 percent to US$3,864 and skim milk powder tumbling 7 percent to US$3,126. Cheddar prices also fell 9.2 percent to US$3,949.

Macquarie will purchase AMP Capital’s Global Equities and Fixed Income division, which includes AMP Capital NZ. The Australian fund manager will pay up to A$110 million in cash and a cash earnout of up to A$75m, payable after the second anniversary of the transaction. The division manages approximately A$60 billion of assets for AMP Australia as well as a number of external institutional, retail and direct clients. The NZ division manages $20b for superannuation schemes, iwi, insurance providers, and charitable trusts.

Radius Residential Care said it would raise up to $50 million to fund growth, including buying four aged-care facilities. $10m of the new shares will be used as part-payment for the purchases, being issued to the vendor, Ohaupo Holdings. The company said the purchases are strategically important facilities Radius already operates but doesn’t own and any additional funds over the purchase costs will be used to reduce debt. The acquisitions will increase Radius’ brownfield development pipeline and give it ownership of facilities adjacent to two co-located retirement villages that it owns and operates.

The Financial Markets Authority (FMA) said it had concluded its inquiry into Fonterra on the timing of accounting write-downs for Beingmate Baby and Child Food Co and its China Farm assets saying it “did not find evidence to support regulatory action, including litigation, under the Financial Markets Conduct Act”. The inquiry followed complaints that the value of these and other assets were re-stated in a Fonterra market announcement in August 2019. From September 2017 to April 2018, the FMA engaged with Fonterra on its valuation of Beingmate for the year ended 31 July 2017.

Kiwi Property Group confirmed the interest rate it would pay on its green bonds issue had been set at the minimum 2.85 percent and it will sell a total of $150 million after the sale was heavily oversubscribed. The company had planned to sell at least $100m and had allowed for oversubscriptions of up to $50m. The coupon on the bonds, which will be listed on the NZX, was set following a book building process among institutional investors. Kiwi lowered the indicative range on Wednesday to 1.25 percent to 1.35 percent over the swap rate from the original 1.35 percent to 1.5 percent once the demand for the bond issue became apparent.

The week ahead…

Mon: Kiwi Property AGM; Electronic Card Transactions (June) – Stats NZ

Tues: Food Prices Index (June) – Stats NZ

Wed: Reserve Bank Monetary Policy Review; Tilt Renewables SSM

Fri: Consumer Price Index (June quarter) – RBNZ; Vehicle registrations (June) – Stats NZ

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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