As the Reserve Bank prepares to deliver its latest Monetary Policy Review on Wednesday, the banking mini-crisis that had global equity markets on edge in recent weeks appears to have abated – for now.
While a further 25 basis points hike is almost a certainty, taking the OCR to 5 percent – its highest level since December 2008 – investors will be paying close attention to the Reserve Bank’s latest assessment of the economy, and more particularly, the likely pathway for interest rates from this point.
“On balance, local data since the February monetary policy statement has not convincingly tilted things in either direction,” ANZ chief economist Sharon Zollner noted in a preview ahead of this week’s decision.
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“But global financial sector wobbles suggest a degree of caution is appropriate, which the Reserve Bank can now afford given they are fairly confident the official cash rate is now in contractionary territory.”
Zollner continues to forecast the official cash rate peaking at 5.25 percent following one more 25bp hike in May.
Gross domestic profit for the December quarter fell 0.6 percent, in stark contrast to the Reserve Bank’s expectation of a 0.7 percent lift, as the data showed clear evidence of slowing economic momentum.
While labour market data has held up reasonably well in the face of higher rates, sectors such as retail are increasingly feeling the pressure as consumers begin to rein in their spending, an issue The Warehouse Group noted recently after announcing a dramatic slide in its latest half year result which the company said will necessitate more than 300 redundancies at its Auckland service centre.
Sky Television also confirmed plans to axe 170 jobs locally and outsource many of its technology, content operations and customer service roles overseas. The satellite broadcaster will cut 90 jobs in its NZ-based technology and content teams and outsource the roles to India’s Tata Consultancy Services.
A further 80 jobs are also set to go in the group’s New Zealand customer service team, to be outsourced to Australian company Probe CX, which operates customer service centres in the Philippines.
The sudden closure last week of radio network Today FM after only 12 months on air resulting in the loss of up to 30 jobs was blamed by its owners Mediaworks on a dramatic slide in advertising dollars in recent months in a further sign that many businesses are actively cutting costs in anticipation of tougher times ahead.
House sales listings down 18%, prices down 16%
House prices continue to fall and are now down more than 16 percent from their peak with the country’s largest real estate group Barfoot & Thompson recently reporting that it sold just 410 residential properties in February, a 45 percent fall on the same month last year and its worst sales result for the month of February in 25 years.
Realestate.co.nz data for March sales listings, published today, shows buyers bide their time waiting for the market to show signs of bottoming out.
The slowdown in the residential building sector continues with new dwelling consents recording a 9 percent fall in February compared to January, after accounting for seasonal factors.
The big question occupying the minds of investors globally is the point at which central banks decide they need to begin cutting rates as economies begin to contract.
Despite signs of a slowdown, Zollner is in the camp that says rate cuts may still be some time away.
“To be clear, we don’t think the Reserve Bank will be cutting for some time, but equally, we doubt markets are likely to get back to calling for stiffer hikes (as they were a month ago) any time soon. In time, it may well be that markets start to re-focus on inflation if [they aren’t] dented by financial instability, but that could be months away, and in the meantime, we expect downside fears to dominate market psychology.”
All of which leaves investors facing a dilemma as markets continue to remain erratic and largely directionless.
The only sensible way to approach investing right now is to be “patient, selective and defensive which means prizing quality investments and resisting the forces of FOMO,” one chief investment officer put it recently.
That may be the best advice investors are going to get for now while markets grapple with a growing number of contradictory cross currents that look likely to continue for some time yet.
Markets change their tune to end the first quarter in the black
After wiping out all its gains for the year just a week ago, the NZX50 managed to end the first quarter up 2.6 percent, while in the US the Nasdaq Composite stock index closed out its best quarter since 2020, buoyed from bets on Big Tech companies by investors who rolled back expectations for higher interest rates.
Investors snapped up beaten down stocks as global equity markets rebounded after sensing that the US Federal Reserve and the European Central Bank had contained the mini crisis that had engulfed their respective banking sectors recently. Additionally, a growing belief that central banks will be unable to keep raising rates to fight inflation added to the positive sentiment.
The moves capped what has been a volatile start to the year, with a strong January followed by a weak February and a rebound over the past few weeks.
“The narrative has changed dramatically in the tug of war between the Fed and market participants,” Rich Steinberg, chief market strategist at the Colony Group, a US$19b wealth manager, told the Financial Times.
Lower interest rates increase the appeal of companies that promise long-term growth. Mega-cap tech groups such as Microsoft and Apple are also seen as less exposed to a potential downturn in bank lending if difficulties in the regional banking sector continue.
“Although there’s been a lot of big winners, the average stock is lingering,” Steinberg added.
Data released on Friday also strengthened investor confidence about the outlook for rates.
In the US the core personal consumption expenditures index — the Fed’s preferred measure of inflation — softened in February to a year-on-year rise of 4.6 percent, slightly lower than consensus forecasts, while inflation in the Eurozone also slowed sharply to 6.9 percent in an unexpected turnaround after months of steady increases.
The 20 countries that make up the Eurozone recorded slowing inflation rates, although food prices rose with energy prices falling according to data from the official European Union’s statistics agency. However, most analysts believe the figures are unlikely to deter the European Central Bank from raising rates by a quarter percentage point to 3.25 percent when it meets in early May.
US government bond yields declined with the yield on the policy-sensitive two-year Treasury falling 0.07 percentage points to 4.03 per cent. The 10-year yield fell 0.08 percentage points to 3.48 per cent having been above 4 percent less than a month ago. Bond yields fall when prices rise.
Asian equities also advanced last week, buoyed by stronger than expected economic data in China.
Activity in China’s non-manufacturing sectors grew at its fastest rate in more than a decade in March as business confidence rocketed and demand grew steadily in the wake of Covid-19 restrictions ending, according to a closely-watched official gauge.
Synlait Milk reports dramatic slide in profitability
Synlait Milk posted an 83 percent slump in first-half profit as it confronted increasingly expensive supply costs and falling sales.
The Rakaia-based company reported a net profit of $4.8 million in the six months ended Jan 31, down from $27.9m a year earlier, despite widening its gross margin to 10.6 percent from 8.7 percent a year earlier.
Adjusted profit, which strips out one-off costs associated with a major software upgrade to better manage the company’s inventory and supply chain issues, dropped 43 percent to $8.9m with revenue dipping 3 percent to $769.8m.
Synlait downgraded its annual forecast last month, predicting profit to be between $15m and $25m, and added another year to its recovery programme, which is now expected to take three years.
The company’s share price touched a new low of $2.06 last week, a year-to-date decline of more than 40 percent.
Disney to axe more than 7,000 jobs
Disney has become the latest high profile US company to announce major job cuts.
Chief executive Bob Iger announced the first of three rounds of expected cuts would begin this week following his announcement in February that the company would axe up to 7,000 jobs.
The cuts to Disney’s global workforce are part of a multibillion-dollar cost-cutting initiative aimed at streamlining the company’s operations in a period of media industry turmoil.
“The difficult reality of many colleagues and friends leaving Disney is not something we take lightly,” Iger said in a memo to staff. “In tough moments, we must always do what is required to ensure Disney can continue delivering exceptional entertainment to audiences and guests around the world – now, and long into the future.”
Disney had around 220,000 employees as of October, of whom approximately 166,000 were employed in the United States. A cut of 7,000 jobs represents almost 3 percent of its global workforce.
