Business & investing: Regional centres are finding it just as difficult to recruit staff as employers in the main cities, with more than 400 jobs advertised in Queenstown
Just as markets looked as though they were building some momentum after a month of solid gains, US Federal Reserve chair Jerome Powell stopped the advance in its tracks. He hiked interest rates by 75bp for a fourth time and signalled that rates are likely to rise much higher than previously expected, thereby dashing any likelihood of a Fed “pivot”.
Adding to market pressures, the monthly US jobs report indicated the labour market is still running “hot”.
It was a similar story here with the local labour market data “as tight as a drum” according to Kiwibank economist Jarrod Kerr, noting that the difficulty in finding the right staff, at a reasonable cost, is the biggest constraint facing many Kiwi businesses.
Kerr said the scramble among firms for staff, while at the same time workers were expecting large pay rises, meant wage growth had “further to climb”.
Kiwibank is forecasting labour cost index wage inflation to break above 4 percent in Q4, but given the labour market lags economic growth, it sees the labour inflation growth peak at about 4.5 percent in the middle of next year, suggesting the wage growth peak would be a year after consumers price index inflation peaks.
Average ordinary time hourly earnings increased by 7.4 percent in the year to the September 2022 quarter (the largest annual rise in ordinary time hourly earnings since the series began in 1989 according to Stats NZ senior manager Darren Allan), while wage inflation, as measured by the labour cost index, was 3.7 percent, Stats NZ said.
And it’s not just major centres that are desperate for workers. Last week more than 400 jobs were advertised in Queenstown suggesting regional centres are finding it just as difficult to recruit staff as employers in the main cities.
In the US, the Nasdaq Composite index fell 5.6 percent for the week, its biggest weekly decline since late January.
Concerns over a higher “endpoint” for interest rates weighed on technology stocks that comprise the index and are more sensitive to elevated borrowing costs. The S&P 500 fell 3.3 percent for the week, its biggest weekly decline since late September, while the NZX50 finished the week 0.9 percent higher at 11,230.
Fed chair Jay Powell’s warning that recent data suggested “the ultimate level of interest rates will be higher than expected” sent stocks lower and led to a sharp jump in US short-term government bond yields. Investors also scrutinised data released on Friday that showed the US added 261,000 jobs in October, exceeding Wall Street expectations of 200,000.
The unemployment rate, however, increased by 0.2 percentage points to 3.7 per cent in October, higher than the 3.6 percent predicted. Wages, meanwhile, rose 0.4 per cent from the previous month, the report showed – higher than the 0.3 percent rise forecast.
Many analysts now expect a smaller 0.5 percentage point rise at the Fed’s final meeting for the year in December. The US dollar index, which tracks the currency against six peers was largely unchanged for the week.
The yield on the two-year Treasury, which is particularly sensitive to short-term monetary policy expectations, declined from its peak last week when it reached its highest level since mid-2007. The yield on the note fell 0.04 percentage points to 4.66 percent on Friday.
Markets rebound in China amid speculation of Covid lockdowns easing
Chinese stocks soared, extending their weekly gains on hopes Beijing would change its longstanding zero-Covid policy.
The CSI 300 index of Shanghai and Shenzhen-listed shares gained 3.3 percent.
Industrial metal prices skyrocketed on the news. Copper, a barometer of health for the global economy, jumped 8 percent higher to breach $8,000 a tonne for the first time in two months. Other base metals nickel, zinc and tin also jumped up by more than 5 percent after sliding lower since March on macroeconomic fears that have trumped supply concerns.
Gold also gained 2.1 percent to US$1,681 per troy ounce, its best week since July. Any suggestion the Fed plan to slow further rate hikes boosts gold’s attractiveness.
Financial stability risks increasing
The Reserve Bank and the US Federal Reserve released reports on financial stability last week and not surprisingly both central banks highlighted the growing risks arising from moves to tighten monetary policy on a scale not seen since the 1980s.
The US Federal Reserve warned of the potential for financial distress that damages the economy if interest rates rise to levels higher than expected, in a report that underscored the stakes of its drive to control stubborn inflation. Its latest report on financial stability highlighted a constellation of risks including a weaker global economy, “unacceptably high” inflation, and geopolitical turmoil. It said these currents had magnified volatility in some asset classes.
The Bank of England also raised rates by 0.75 percentage points last week along with the European Central Bank which also opted for a jumbo rate rise. The Fed is raising rates in an attempt to cool down an economy marked by persistently high inflation.
Should they need to rise more than expected that “would weaken the debt service capacity of households and businesses and lead to an increase in delinquencies, bankruptcies, and other forms of financial distress”, its financial stability report said.
The Fed added this could eventually lead to heightened volatility in markets, strained liquidity and further drops in asset prices, including in housing. “Such effects could cause losses at a range of financial intermediaries, reducing their access to capital and raising their funding costs, with further adverse consequences for asset prices, credit availability, and the economy.”
A rapid string of interest rate rises, followed by the potential of a recession, have ignited fears of an unintended market meltdown, especially given strained liquidity conditions. The Fed said there were signs delinquencies on new home mortgages were creeping up and downgrades in the corporate sector had quickened. However, the Fed noted leverage within the US banking system remained relatively low and large banks were well capitalised to absorb shocks “even during a substantial economic downturn”.
Meanwhile, the Reserve Bank of New Zealand said the global economic outlook continues to worsen and would test NZ’s financial system but it remained confident it was well-placed to cope.
“Banks have strong capital and liquidity positions and profitability and asset quality is high.”
While house prices have fallen, the central bank said they remain “above their sustainable level”.
The Reserve Bank pointed out a small number of recent house buyers now had negative equity in their homes with mortgages greater than the value of their properties and it expected that number would continue to grow if prices fall further, it said.
“A significant decline in house prices remains a possibility, which would create challenges for some recent buyers,” the Reserve Bank said.
It estimated house prices had now fallen more than 11 percent from their peak.
“With widespread negative equity, banks would be more at risk of losses if people can no longer afford their mortgage, for example, if they lose their job,” the central bank said.
“It is important that financial institutions take a long-term view when supporting customers and allocating credit to the wider economy,” said Reserve Bank Governor Adrian Orr.
Over the coming year, consumption is expected to slow as households face higher mortgage payments and a decline in wealth from falling house prices.
“Households with mortgages will have less income to spend outside of necessities, slowing economic activity,” the Reserve Bank said.
Rising interest rates have reduced how much people can borrow to buy a home and the attractiveness of property investment.
Central banks have rapidly tightened monetary policy but the extent to which economic activity will slow “remains uncertain”.
Coming up this week
- Heartland Group Holdings AGM
- Survey of Expectations – RBNZ
- Pushpay Holdings Half Year Result
- Manaway Energy AGM
- Electronic Card Transactions – Oct ‘22
- Mainfreight Half Year Result
- Goodman Property Trust AGM