Business and investing: Markets close higher on improving inflation outlook, but are yet to price in 8.7 percent increase in food supply costs
Cost increases from grocery suppliers to supermarkets continue to rise, with the Infometrics-Foodstuffs NZ Grocery Supplier Cost Index showing an 8.7 percent increase in the year to August.
The index measures the change in the cost of grocery goods charged by suppliers to the Foodstuffs North and South Island cooperatives.
“This Index tracks what it costs supermarkets to buy the goods to put on the shelf,” says Infometrics principal economist Brad Olsen. Previous analysis shows that supplier costs are the major component of supermarket prices, representing two-thirds of the on-shelf price.
“Sustained higher input costs are driving suppliers to pass on these higher costs. The continued rise in both the number and scale of cost increases from suppliers to supermarkets underscores the continued mounting pressure on retail grocery prices,” Olsen said.
Despite elevated inflation levels globally, a large interest rate rise in the EU and hawkish remarks from Federal Reserve chair Jay Powell, equity markets have recovered some of their recent declines.
The NZX50 gained 1.1 percent for the week to close at 11,758, across the Tasman Australia’s ASX200 added 1 percent, while in the US the blue-chip S&P 500 closed 3.6 percent higher for the week at 4,067, managing to push back above the 4,000 level since late last month.
This week’s monthly US consumer price index reading due out on Tuesday (US time) will be key for setting the market’s direction from here with economists polled by Reuters expecting a reading of 8.1 percent year-on-year for August, down from 8.5 percent in July.
Wall Street’s gains came despite US Fed chair Jay Powell reiterating earlier hawkish messaging that the central bank needed to “act forthrightly” on inflation.
Markets are now pricing in another probable 0.75 percentage point interest rate rise for the US central bank’s next monetary policy decision later this month, which would mark the third consecutive 75bp increase, a prospect few market experts could have contemplated at the start of the year.
At least eight Federal Reserve officials spoke publicly last week, all delivering similar lines, in what appeared to be a co-ordinated show of unity on the Fed’s current monetary policy stance.
One by one they each acknowledged the economic and market pain their hiking policy could inflict and then reiterated that for the time being they would keep on with their aggressive regime to fight pervasively high inflation rates.
At a think tank conference last Thursday, Powell reiterated the importance of the Fed staying the course.
“History cautions strongly against prematurely loosening policy,” he said at the Cato Institute’s 40th Annual Monetary Conference. “I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”
Reflecting the Feds hawkish outlook, the 10-year US Treasury yield edged higher for a sixth consecutive week jumping almost 4 percent to 3.31 percent, its highest level since April 2011.
The Reserve Bank of Australia (RBA) hiked its cash rate by a widely expected 50 basis points, with RBA governor Philip Lowe saying the Australian central bank remained committed to returning inflation to between 2-3 percent.
Lowe said the RBA expects to continue increasing interest rates in the months ahead but is not “on a pre-set path.”
The European Central Bank (ECB) and the Bank of Canada both hiked their key interest rates by 0.75 percentage points confirming that G10 central banks are now more in sync with the scale of tightening being undertaken by the Fed.
The ECB’s hawkish rhetoric led some analysts to expect another large increase at its meeting in October, with Deutsche Bank anticipating another three-quarter point rise.
However, analysts also warned that risk appetite is unlikely to be sustained in the face of further rate hikes increasing the liklihood that further tightening in financial conditions will continue to fuel support for the US dollar which gained for a sixth straight week, briefly pushing the NZ dollar below 60 US cents for the first time since May 2020.
Locally, the RBNZ will announce its next monetary policy review on 5 October with most economists expecting another 50bp point increase taking the OCR to 3.5 percent, while GDP for the June quarter will be announced this Thursday.
On commodity markets, Brent Crude Oil futures fell to a nine month low of US$87.28 last week before finishing the week at $US92.11, while the gold price continues to drift closing at US$1717 an ounce barely changed for the week.
The change in risk sentiment saw cryptocurrencies push higher with Bitcoin gaining 8 percent for the week to US$21,600 and Ether climbing 12 percent to $1766.
Fonterra lifts payout forecast
Continuing strong global demand for dairy has seen Fonterra increase its forecast earnings guidance for the 2022-23 season.
However, the impact of recent weather events, particularly flooding in the Far North and the top parts of the South Island, meant it decreased its forecast for milk collections.
The dairy group revised its 2023 forecast earning guidance to between 45 to 60 cents per share, up from 30 to 45 cents per share, while its forecast milk collections for the season decreased from 1,510m kgMS (per kilogram of milk solids) to 1,495m kgMS.
Fonterra also announced the launch of a new “wellbeing solution brand” targeting the medical and wellbeing nutrition markets.
The dairy giant has described the growth opportunity for the new business-to-business brand, Nutiani as “significant” saying the new brand brings to life concepts that help customers tailor their products to meet consumers’ evolving wellbeing nutrition needs.
Restaurant Brand announces changes at the top
Restaurant Brands New Zealand announced its group chief executive officer Russel Creedy and chief financial officer Grant Ellis will both retire next year.
The company, which operates KFC, Pizza Hut, Carl’s Jr and Taco Bell franchises, told the NZX that Creedy would step down at the end of March and Ellis at the end of May.
Chairman José Parés said Creedy and Ellis had made an “enormous contribution” with their leadership and expertise to the company’s growth and transformation over the more than 20 years they’d spent in their respective roles.
Since peaking at $16 in August last year Restaurant Brands shares have almost halved in value to $8.15 last Friday.
DGL shares plunge on downbeat earnings outlook
DGL chief executive Simon Henry bought half a million dollars’ worth of shares in the chemical company he founded after its share price slumped telling the Australian Financial Review that investors had “overreacted” to the company’s earnings outlook.
DGL reported better than expected earnings growth in the 2022 financial year but warned shareholders it would not repeat the result in the coming year.
The shares initially fell more than 50 percent following the announcement despite the company reporting an 88 percent lift in revenue and profit up more than 150 percent.
Coming up this week
- Food Price Index (Aug) – Stats NZ
- Briscoe Group Half Year Result
- Trade Window Holdings AGM
- Ascension Capital AGM
- Balance of Payments (June Qtr) – Stats NZ
- Gross Domestic Product (June Qtr) – Stats NZ
- Greenwood Capital AGM
- Evolve Education Group SSM