Business & investing: Inflation shocker paves the way for OCR to hit 5 percent next year, but NZ sharemarket not unduly rattled
Investors received yet another unwanted reality check last week after the June quarter consumers price index reading came in at 7.2 percent, well above economists’ forecasts of 6.5 percent to 7 percent.
It almost certainly paves the way for the Reserve Bank to hike the official cash rate by a more aggressive 75bp when it meets in a month.
Kiwibank economist Jarrod Kerr described the latest consumers price index reading as a “shocker” pointing out that while imported inflation is cooling somewhat, domestically generated inflation is heating up after local prices rose from an annual rate of 6.3 percent to 6.6 percent.
As expected, food and housing were the main contributors. But the report was much stronger than expected across the board. Stripping away the volatile price movements in food and energy, core inflation accelerated from 6.1 percent year-on-year to 6.3 percent.
It now seems increasingly likely the OCR will hit 5 percent by early next year, a looming shock for many mortgage holders still enjoying the luxury of fixed interest rates that were secured when borrowing was cheap.
However, the local sharemarket was not unduly rattled by the news with the NZX50 ending the week down just 0.8 percent at 10,782, while the NZ dollar enjoyed its best week in almost two years rebounding 3.6 percent to 57.6 US cents after expectations of a 75bp hike by the RBNZ next month.
Is the US Federal Reserve about to change course?
In the US it was a different story as investors reacted to a story in the Wall Street Journal on Friday suggesting the US Federal Reserve may be considering slowing the pace of interest rate rises from December which sent the S&P500 surging 4.7 percent for the week, its best weekly performance since June.
The US central bank has lifted borrowing costs by an extra-large 75bp over each of its past three meetings, taking its target range to between 3 percent and 3.25 percent. Markets on Friday were pricing in expectations of US rates rising to just under 4.9 percent by May 2023, down from expectations of 5.02 percent on Thursday.
In government debt markets, US bonds steadied after coming under pressure earlier in the session. The yield on the benchmark 10-year US Treasury note was flat at 4.22 percent after rising for a 12th consecutive week.
Investors were also scrutinising the latest financial statements from companies during the ongoing earnings season for evidence of emerging strains from high inflation, rising borrowing costs and challenging economic conditions.
Companies under pressure as earnings slow
Shares of former market darling Snap plunged almost 30 percent after the developer of camera and messaging app Snapchat revealed revenue growth had slowed dramatically and losses had ballooned in the third quarter. Advertisers were continuing to cut marketing budgets because of macroeconomic headwinds, Snap said. Shares of Facebook-owner Meta and Twitter ended the week down 1.2 percent and 4.9 percent respectively.
Across the Atlantic the pain is also being felt among leading European stocks with Adidas among the biggest decliners in the region after shares in the Germany-listed sportswear group slid almost 10 percent after it sounded the alarm on profits for the second time in three months. Shares in rival Puma fell more than 7 percent, and JD Sports Fashion dropped by more than 6 percent.
Consumer goods groups Procter & Gamble and Nestlé also highlighted the growing impact of inflation as they reported third-quarter earnings. Both companies reported falling sales volumes in the three months to September, while Nestlé chief executive Mark Schneider said the Swiss group would lift prices further to pay for higher energy and labour costs. Ohio-based P&G said it had taken an additional hit from the strength of the dollar.
One bright spot for the week was Netflix. After disappointing investors in the previous quarter, shares in the streaming giant surged 25 percent for the week after it published results showing it had managed to stem its subscriber losses in the third quarter. Popular series such as Stranger Things had helped it add 2.4m subscribers, more than double that forecast by the streaming group three months ago.
Elsewhere in global debt markets, UK bond yield soared 0.16 percentage points to 4.06 per cent, as investors grappled with uncertainty over the government’s borrowing plans after the resignation of British prime minister Liz Truss. Bond yields rise as their prices fall.
New data out on Friday also showed UK retail sales fell more than expected in September, heightening concerns that the country was heading for a recession.
Hong Kong shares retest 2009 lows as China worries grow
Meanwhile, shares in Hong Kong slumped to their lowest level since the end of the global financial crisis as investors reacted to the city’s economic recovery plans and the 20th Chinese Communist party congress in Beijing, where incumbent President Xi Jinping has secured a third term.
The benchmark Hang Seng index fell to its lowest level since May 2009. Hong Kong’s equities have underperformed US and European markets this year as geopolitical tension between Beijing and Washington show no signs of easing. Shares have also suffered from a regulatory assault on the tech industry in China, while a growing real estate crisis is also weighing on economic growth.
Last week’s slump came after Hong Kong leader John Lee’s inaugural policy address unveiling measures to attract international business and talent stopped short of scrapping inbound travel or social distancing restrictions because of the Covid-19 pandemic.
Mainfreight and Auckland Airport shares rebound on upbeat outlook
Mainfreight provided some welcome reassurance for the local market after providing an upbeat earnings outlook.
The country’s largest freight and logistics company said first-half revenue was up by almost a third at $3.01 billion in the 26 weeks to September 30, with net profit rising nearly 66 percent to $301.7m.
Mainfreight shares finished the week up 2.5 percent at $68.01 after trading as high as $70.15 after the announcement.
Analysts said a strong first half had been anticipated, but revenue and profit growth came in well above expectations.
In its investor-day presentation, the company said trading through to September had shown “good momentum”, with all divisions tracking ahead of the prior periods. Transport was seeing consistent tonnages, while air and ocean were experiencing strong trading, with new business gains helping to offset the expected global shipping rate reset.
Meanwhile, Auckland International Airport lifted its 2023 profit guidance to be between $100m and $130m thanks to a rebound in the aviation market.
The airport told the NZX that its underlying profit after tax had been raised from its original August guidance of between $50m and $100m because of high aircraft load factors and continued strength in international seat capacity.
Auckland Airport shares finished the week up 2 percent at $7.32 after trading as low as $7.05 earlier in the month.
Coming up this week
- Michael Hill International AGM
- Skellerup Holdings AGM
- Fletcher Building AGM
- Chorus AGM
- Winton Land AGM
- EBOS Group AGM
- Solution Dynamics AGM
- MHM Automation AGM
- Freightways AGM
- New Residential Mortgage Lending (Sept) – RBNZ
- Port of Tauranga AGM
- SkyCity Entertainment AGM
- Employment Indicators (Oct) – Stats NZ
- Property Transfer Data (Sept) – Stats NZ