Confidence from US Federal Reserve chair Jerome Powell over inflation and interest rates kept markets buoyant. But higher mortgages and job losses could dampen consumer spending in NZ longer term
Despite growing talk of an impending recession later in the year, stocks both here and in the US show no sign of losing the momentum that has given markets one of the best starts to the year in decades.
In the 15 weeks since the market bottomed in late October, the NZ sharemarket has fallen in only three of those weeks, reinforcing the underlying bullishness of local investors. What also caught the attention of market technicians last week was the NZX50 pushing above its weekly 100-day moving average for the first time in almost a year. Seasoned investors generally consider this a buy signal.
Adding to the positive sentiment was the US Federal Reserve’s decision last week to ease off the rate hike accelerator for the first time since April last year, increasing its key Federal Funds Rate range by just 25 basis points to between 4.5 and 4.75 percent – it’s smallest rate increase in 11 months.
Fed chair Jerome Powell struck an upbeat tone in his first media conference of the year not only about the economic outlook in the US but also the central bank’s grip on inflation, and this helped fuel a rally both in US government bonds as well as equities.
While Powell’s optimism might have been subtle, the world’s most influential central banker repeatedly said that for the first time he was confident the “disinflationary process” was finally underway and that he saw a “path” to bringing inflation down to the Fed’s 2 percent target without a “really significant economic decline or a significant increase in unemployment”.
The comments were music to the ears of investors who are now more confident than ever that rate hikes are almost a thing of the past.
Most officials have signalled the Fed must increase its key interest rate to 5.1 percent before considering cuts – and that’s unlikely before 2024. Yet traders’ bets suggest it will be forced to start loosening monetary policy before the end of the year.
The pressure is now building for Reserve Bank Governor Adrian Orr to follow suit when, in a bit over two weeks’ time, he delivers the central bank’s first monetary policy statement for the year, although Orr is also having to be mindful of the serious flooding damage inflicted on Auckland over the last 10 days.
There is now a growing consensus amongst economists the RBNZ will opt for a 50bp hike on 22 February, compared to the almost universal belief before Christmas that a further 75bp hike was a near certainty.
US job market remains tight
However, tempering last week’s positive response to the Federal Reserve’s announcement was a blowout monthly jobs report on Friday showing the US labour market is showing no signs of easing. In fact, quite the opposite.
“I’m shocked by these [high employment] numbers. If they’re really reflective of what’s going on in the economy, one has to ask why the Fed is slowing down hiking interest rates?
– Financial Times
While recent headlines have highlighted a growing number of high profile layoffs in the tech sector, the news isn’t representative of the employment situation more broadly. January saw 517,000 jobs added, almost double December’s number and significantly higher than the 185,000 anticipated by Wall Street economists. The jobless rate fell to a multi-decade low of 3.4 percent, from 3.5 percent the previous month.
“I’m shocked by these numbers,” one economist told the Financial Times. “If they’re really reflective of what’s going on in the economy, one has to ask why the Fed is slowing down hiking interest rates?”
Friday’s monthly jobs figures suggest the US economy remains resilient despite significant monetary tightening over the past year, puncturing some optimism that the Fed would cut rates later this year.
“Before these numbers we thought the Fed had maybe one more hike left in it, but today’s job numbers make me think there’s now at least another two to go,” Fitch Ratings chief economist Brian Coulton told the FT.
The bears are lurking
Locally, not everyone is backing the positive enthusiasm of sharemarket investors when it comes to forecasting the outlook for the NZ economy.
Infometrics chief forecaster Gareth Kiernan is now expecting the Official Cash Rate (OCR) to reach 5.75 percent later this year, compared to 4.25 percent now, and with it he expects will come significant pain.
“We expect a prolonged contraction in the economy through until March 2024 as fixed mortgages roll off and households grapple with higher interest rates,” Kieran said last week.
“The Reserve Bank is on track to lift the official cash rate to 5.75 percent by mid-2023, taking mortgage rates above 7 percent for the first time since 2008. In tandem with other cost-of-living pressures, higher mortgage repayments are starting to reduce spending volumes compared to the last couple of years.”
Although household spending and economic growth are expected to stabilise by mid-2024, an unemployment rate above 5 percent will limit growth right through the following year, Kiernan says. Meanwhile job losses will impact directly on consumer spending, with increased nervousness about job and income security leading to more cautious behaviour across a broader range of households.
On the plus side, Kiernan points out that international shipping rates have fallen as much as 80 percent from their peak in late 2021, and global production levels are set to be more stable with the end of lockdowns in China. Labour shortages in New Zealand are also becoming less acute as the inflow of foreign workers ramps back up, boosted by the government’s immigration Green List.
House price falls
Against this backdrop however, house prices are expected to end 2023 down 22 percent from their peak two years earlier, with residential consent numbers plunging almost 30 percent as higher building costs make projects unviable. Even so, house prices are still forecast to be 17 percent above where they were at the end of 2019, meaning the housing affordability crisis will remain unresolved.
With just over eight months until the election, Kiernan believes the deteriorating outlook represents a challenge for the new-look Labour Government as it gets set to face voters.
“Governments are often judged at the polls by the state of the economy, and by October, all the indicators are likely to be pointing in the wrong direction for Labour’s re-election chances.”
Sharemarket investors seem to have other ideas as to how things will pan out this year and aren’t buying into the downside scenarios – at least not yet.