Oil prices surge 13 percent after dramatic supply cut by oil producing nations, putting new pressure on inflation and interest rates
There was plenty for investors to digest this past week including a sharp rise in the price of oil after a dramatic supply cut by OPEC, a surprise lower than expected rate hike from the Reserve Bank of Australia, a more hawkish Reserve Bank monetary policy statement and a business confidence survey that suggested things might not be as bad as they seem.
However, in the US economic news that would normally be considered good (falling unemployment) has instead become bad news for investors (more rate hikes) which ended the week on a downbeat note for markets after US unemployment fell to a record low of 3.5 percent pushing the S&P500 down almost 3 percent.
More rate hikes still to come
There is now a growing sense the Fed will once again hike by a further 75bp, for a fourth time, in November which is likely to be followed by an additional 50 basis points hike in December taking its key interest rate to 4.5 percent by year end.
It’s a similar situation here with the Reserve Bank almost certain to lift the OCR to 4 percent at its final meeting in November, barring a significant fall in the consumer price index due out next week.
In its latest monetary policy statement governor Adrian Orr remained resolute in his approach saying the central bank would continue to tighten rates until inflation was back within its mandated 1-3 percent target range raising the prospect of the OCR potentially having to peak at 4.5 percent early next year.
The Reserve Bank of Australia was the outlier for the week opting to hike its cash rate by just 25 basis points which initially sent equity markets higher as investors contemplated the possibility of a long awaited ‘pivot’ by central banks.
US labour market remains as tight as ever
The optimistic tone adopted by investors at the start of the week was short lived after jobs data realised on Friday (US time) showed US employers added 263,000 new jobs in September, down from 315,000 in August, but well above Wall Street expectations quickly sending markets into reverse.
Investors have been scrutinising jobs data for clues about the future direction of US monetary policy.
The state of the labour market is regarded as a crucial influence on decision-making by the Federal Reserve, with signs of robustness typically fuelling expectations that the central bank will continue with aggressive interest rate rises.
As a result the S&P500 ended the week up 1.5 percent after being up as much as 5 percent at one point. The NZX50 was relatively flat gaining just 0.3 percent for the week while Australia’s ASX200 surged 4.5 percent as a result of the lower than expected Reserve Bank of Australia rate hike.
Oil prices rebound sharply higher following supply cuts
Crude oil prices ended the week on a high note, with Brent Crude oil futures surging 13 percent for the week to US$98.33 per barrel after OPEC+ agreed to slash its production targets for November by 2 million barrels per day, the deepest cuts since the height of the Covid pandemic.
The news will almost certainly translate into even higher inflation at a time when the NZ dollar continues to weaken.
Investment bank Goldman Sachs raised its 2022 Brent price forecast to US$104 per barrel from $99 and its 2023 forecast to $110 per barrel from $108 previously after describing the cuts as “very bullish” for oil prices.
Shares in Woodside Petroleum, Australia’s largest oil producer, jumped more than 8 percent last week.
US tightens export controls on China
Also helping drive equities lower in the US was a drop in semiconductor stocks following an announcement from the White House that it will implement export controls that limit China’s access to semiconductors.
Advanced Micro Devices was among the biggest fallers on the Nasdaq on Friday, with its shares losing just under 14 percent after the US chipmaker on Thursday cut its third-quarter revenue estimate by about $1.1bn from its previous forecast. Shares in other semiconductor groups also fell sharply.
In government bond markets, the yield on the 10-year US Treasury note added 0.06 percentage points to 3.89 percent.
Q3 earnings in the US set to decline
This week will mark the start of third quarter earnings results in the US with Wall Street banks slashing their expectations by more than US$34bn over the past three months. Analysts are now anticipating the lowest rise in corporate profits since the depths of the Covid crisis.
Consensus expectations are for earnings-per-share growth of 2.6 percent in the July to September quarter, compared with the same period a year earlier, according to FactSet data. That figure has fallen from 9.8 percent at the start of July, and if accurate would mark the weakest quarter since the July to September period in 2020, when the economy was still reeling from coronavirus lockdowns.
The darkening outlook highlights how concerns over Federal Reserve rate increases and early signs of deterioration in the US economy have left investors more cautious on the prospects of listed companies. Wall Street’s S&P 500 has already fallen by about a fifth this year as fund managers adjust to this reality, but a growing cohort of analysts fear that current profit expectations are still overly optimistic.
Meta (Facebook) shares closed on Friday at US$133, nearing a four year low of US$125 set in December 2018.
NZX stocks remain under pressure
Investors here will have to wait another month for half year earnings results from the likes of Mainfreight, F&P Healthcare, Infratil and Ryman Holdings to gauge the temperature of the local market.
Year to date the NZX50 is now down 16 percent at 11, 104, but remains above its low for the year of 10,392 set in June.
Business opinion holding up but price hikes continue
Perhaps the one bright spot for local investors was the NZIER Quarterly Survey of Business Opinion (QSBO) showing business confidence bounced off its low point in the September quarter.
A net 42 percent of businesses see general business conditions deteriorating in the coming six months, an improvement on the net 62 percent back in Q2 – a level that plumbed the lows of the GFC.
Domestic trading activity also lifted in the quarter, firms perhaps breathing a sigh of relief that the worst of covid is behind them and the border fully reopened in the quarter.
But measures of activity remain well below QSBO average levels and suggest a period of below trend growth lies ahead, though this will be welcomed by the RBNZ as it tames inflation given demand has exceeded the economy’s ability to meet it for an extended period.
The latest QSBO showed that while inflationary pressure in the economy eased in the quarter, it remains uncomfortably high. A net 74 percent of firms experienced rising costs in the period, while 65 percent said they planned on hiking prices as a result, albeit down from 76 percent in the previous survey.
Both measures sit well above the survey average and indicate only a gradual fall in inflation is likely.
Coming up this week
- Prices (M1) – Reserve Bank
- Housing Data (June) – Reserve Bank
- Electronic card transactions (Sept) – Stats NZ
- Rua Bioscience AGM
- Food Price Index – Stats NZ
- Rental Price Index – Stats NZ
- Genesis Energy AGM
- Baramundi AGM