Business & Investing: RBNZ faces a similar dilemma to other economies, ever mindful of a highly inflated property market in need of careful deflation without destabilising the broader economy
Markets are desperately hoping they have ruled a line under the worst first six months of the year in more than 50 years.
Few investors this time last year would have expected a perfect storm of such magnitude to engulf markets in the way they have, with such devastating outcomes.
Rampant inflation resulting from Russia’s war against Ukraine which has driven commodity prices, including oil, significantly higher, has led to aggressive central bank tightening that has exceeded even the most pessimistic of forecasts, while plunging consumer confidence has now intensified fears of a synchronised global recession on a scale few would have imagined possible 12 months ago.
Year to date the NZX50 has fallen 18.2 percent resulting in more than $55 billion being stripped from the value of New Zealand’s listed companies.
In the US it’s a similar story with the benchmark S&P500 index slipping into bear market territory after falling more than 20 percent, and in Australia the ASX200 has fallen by 14 percent year to date.
Will the second half of the year be any better or will there be further falls?
The market seems evenly divided on the answer to that question, but the closely watched US Treasury yields may offer investors some clues.
The declining expectations for rate rises and worsening economic outlook have pushed US bond yields from recent highs. The two-year yield — which moves with interest rate expectations — has fallen about 0.6 percentage points from a mid-June high of nearly 3.5 percent.
US government bonds rallied sharply on Friday after a gloomy report on America’s factory sector intensified concerns over the outlook for the world’s biggest economy.
The yield on the 10-year Treasury note, a benchmark for global government bond markets as well as consumer loans and mortgages, fell 0.13 percentage points to 2.88 per cent in thin trading before the Independence Day long weekend in the US. The yield has fallen nearly 0.3 percentage points over the past three days in the biggest such moves since 2020.
In addition, a closely watched survey from the Institute for Supply Management showed the pace of growth in the US manufacturing sector declined sharply in June from May. At the same time, executives polled by the organisation indicated new orders submitted to factories and employment conditions deteriorated because of long lead times and high prices.
The recent string of weak data has led investors to become more worried that measures to dampen down intense inflation by the world’s central banks including the Federal Reserve, European Central Bank and Bank of England, will derail big global economies.
The soft economic data led investment bank JP Morgan to revise down its second-quarter growth estimates on Friday for the US economy from 2.5 percent to just 1 percent.
This Friday’s all important monthly jobs will be closely watched for additional clues that the US Federal Reserve’s aggressive stance on rate hikes may need to be reined in.
June’s nonfarm payrolls are expected to have slowed from the 390,000 added in May, but still show solid job growth and a strong labour market. According to Dow Jones, economists expect 250,000 payrolls were added in June and the unemployment rate held steady at 3.6 percent.
But economists also increasingly expect to see a slowing in employment data, as the Fed’s tighter rates policy squeezes employers and the economy. Some slowing would be seen as a positive, but maintain a balance between a slower, less hot job market and one that has gotten too cool will be the big challenge for central banks.
On the other hand, if the jobs number is particularly strong, markets could react negatively as it would mean the Fed would feel forced to move ahead aggressively to fight inflation with larger rate hikes. Many economists still expect to see the Fed hike rates by a further 75bp when it meets later this month.
“I think the market is caught between two narratives,” one analyst told CNBC last week. “It doesn’t seem to know if it wants good news or bad news. At first, the hot economic news was bad because the Fed could go another 75 basis points and keep going, but now the market wants softer news to keep the Fed at bay. But is the landing going to be soft or hard?
“It’s like threading the needle right now,” he said while pointing out there have been few instances in history where the Fed has managed “a soft landing on such a narrow landing strip”.
Here the RBNZ faces a similar dilemma, ever mindful of a highly inflated property market in need of careful deflation without destabilising the broader economy at a time when hundreds of building companies have already thrown in the towel and recent borrowers are nervously watching interest rates continue to track higher.
There’s also growing pessimism about the outlook for activity and profitability, with supply-side issues dominating the list of problems for businesses.
A net 63 percent of respondents said they expected economic conditions to worsen over the next 12 months, versus a net 55 percent that were negative in May, according to the latest ANZ Business Outlook survey.
Investment intentions also slipped with a net 3.2 percent expecting to pull back on investment versus a net 8.6 percent that intended to increase investment in May.
Earnings season set to determine future market direction
Strategists expect a choppy reaction to the start of earnings season once US companies begin reporting in a fortnight with many expected to lower their future profit guidance. Earnings begin with many of the big banks including JP Morgan and Goldman Sachs kicking off quarterly reporting on July 14.
Many of the country’s leading listed companies here will also report their half-year earnings next month including Fletcher Building, SkyCity Entertainment, Air New Zealand and Auckland International Airport.
E-Road shares yet to bottom
It’s been a devastating 12 months for investors in E-Road, a once promising pioneer in fleet-tracking technology, after the still unexplained sudden departure of its founder and CEO Steven Newman in April which has severely shaken confidence in the company’s future prospects.
Mark Heine, who was recently named the company’s new CEO, faces an uphill battle turning around the business following a share price plunge of almost 80 percent from a high of $6.69 a year ago to just $1.47 on Friday, after its accounts unexpectedly swung into the red.
E-Road investors are yet to be convinced of the merits of its recent $158m takeover of rival Coretex – a deal that closed in December.
Crypto wipe-out gathers pace as another major broker files for bankruptcy
The bad news continues to pile up for crypto investors after US digital asset brokerage Voyager Digital became the latest company to experience financial difficulties telling customers it had temporarily paused all customer trading, deposits and withdrawals.
Voyager’s announcement comes amid a raft of margin calls and defaults across the sector, making the digital broker the latest collateral damage of the broad market selloff in cryptocurrency. The two most widely traded cryptocurrencies, Bitcoin and Ether, are both down more than 70 percent from their peaks last November after the May collapse of the UST stablecoin sent shockwaves through an already tumultuous market.
The news comes a few days after one of Voyager’s customers failed to make payments on a loan worth hundreds of millions of dollars, fuelling growing concerns of a potential insolvency contagion effect across the entire industry.
On Monday, the broker issued a notice that prominent crypto hedge fund Three Arrows Capital had defaulted on a loan worth more than $670m leading it to file for bankruptcy protection, making it one of the biggest casualties of the latest “crypto winter” to date.
Coming up this week …
- Stride Property Group AGM
- Household Labour Force Survey (June Qtr) – Stats NZ
- Dwelling Household Estimates (June Qtr) – Stats NZ
- Goodman Property Trust AGM
- Statistics on Māori Business (March Qtr) – Stats NZ