The New Zealand sharemarket endured a second week of largely directionless trading as investors continue to mull an increasingly uncertain outlook in the face of rising interest rates and the likelihood of further belt tightening by both consumers and businesses.

The NZX50 finished the week up just 10 points on low trading volumes following a loss of 14 points last week.

After rebounding from the lows in the wake of banking mini crisis in the US and Europe last month, the local market has struggled to make headway trading in a tight range of around 150 points since the start of the month as investors continue to ‘fence sit’ awaiting further clarity on both earnings and inflation data from this Thursday’s March quarter CPI reading.

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Despite the Reserve Bank’s aggressive monetary policy stance, Infometrics Chief Forecaster Gareth Kiernan says inflation remains as sticky as ever.

“There is very little evidence that inflationary pressures have started to moderate yet, despite New Zealand’s economy probably being in a recession that started in the final quarter of 2022.”

The agency’s latest economic forecasts predict that annual inflation will still be at 6.6 percent by the end of this year and at 3.8 percent by the end of 2024, noting that the after-effects of Cyclone Gabrielle are showing through in produce prices, and rents and building costs are also likely to be pushed up in impacted regions.

“Although the Reserve Bank can do little about these immediate pressures, they come at a time when pricing behaviour and inflation expectations have already been sustained at a high level for longer than expected,” Kiernan said.

“Domestic transport costs remain problematic for businesses and upward pressure on labour costs is still significant. We now think it could be mid-2025 before inflation is back within the Reserve Bank’s target band of 1 to 3 percent per annum.”

Infometrics also warned consumer spending will continue to be squeezed throughout the rest of the year and into 2024 as households roll off lower fixed mortgage rates and their debt-servicing costs rise.

“The hawkish tone of the Reserve Bank’s most recent Monetary Policy Review suggests that the OCR will increase to 5.75 percent in the next few months.”

But it’s the likelihood of rates remaining higher for longer that Kiernan says possesses the most serious risk for the economy.

“Perhaps the biggest concern for mortgage-holders is that the downwards path for interest rates from mid-2024 is much slower than the rate of increases has been. As a result, the average interest rate being paid across all mortgage debt could remain higher than current levels throughout the next five years.”

Providing further evidence to back up its outlook, Infometrics said cost increases from grocery suppliers to supermarkets remained at elevated levels in March.

The latest Infometrics-Foodstuffs New Zealand Grocery Supplier Cost Index out today shows a 10.3 percent per annum increase in what suppliers charged supermarkets for goods in March 2023, marking six months where the average supplier cost increase has been above 10 percent per annum.

“The latest increase in March continues the rapid pace of cost increases so far in 2023, with producers and others up and down the supply chain still facing intense and sustained input cost pressures,” Infometrics Chief Executive and Principal Economist Brad Olsen said.

The index, which measures the change in the cost of grocery goods charged by suppliers to the Foodstuffs North Island and South Island cooperatives, utilises detailed Foodstuffs NZ data across over 60,000 products Foodstuffs buys to stock in store, providing a real-time view on supplier cost changes.

Fallout from rates remaining elevated could be ‘significant’

In its latest quarterly earnings briefing last week influential US banker JPMorgan Chase CEO Jamie Dimon warned investors and businesses they were likely to be underestimating how long rates may have to remain elevated.

“People need to be prepared for the potential of higher rates for longer,” Dimon told analysts. “If and when that happens, it will undress problems in the economy for those who are too exposed to [interest rate] risk,” he said. “Those exposures will be in multiple parts of the economy.”

Dimon said he had told “all” his bank’s clients to prepare for the risk of higher rates.

“Do not put yourself in a position where that risk is excessive.”

Also weighing in on the issue, the IMF added its warning of a “hard landing” for the global economy in its latest outlook if “persistently troublesome inflation keeps interest rates higher for longer and amplifies financial risks.”

Although the fund left its overall economic forecasts largely unchanged from January, in its latest World Economic Outlook it stressed that signs of resilience alongside lower global energy and food prices masked a darker reality.

Pierre-Olivier Gourinchas, the IMF’s chief economist, said: “Below the surface . . . turbulence is building, and the situation is increasingly fragile.”

Growing stresses in the financial system he said were of particular concern.

“Inflation is proving to be much stickier than anticipated even a few months ago,” he said. “More worrisome is that the sharp [monetary] policy tightening of the past 12 months is starting to have serious side effects for the financial sector.”

In its twice-yearly full forecasts the IMF said the turmoil in the UK government bond market last September and in the US banking turbulence last month showed the “significant vulnerabilities [that] exist both among banks and non-bank financial institutions”.

“Risks to the outlook are heavily skewed to the downside, with the chances of a hard landing having risen sharply,” the IMF said.

In the IMF’s unchanged central forecast, the global economy is expected to grow 2.8 percent in 2023, rising to 3 percent in 2024 and sticking at about that level until around 2028 which it said was the weakest medium-term outlook for the global economy since 1990.

US stocks gain ground for a fourth week

US stocks finished the week with a gain of 0.8 percent for the benchmark S&P500 following better than expected corporate earnings from some of the country’s biggest lenders.

The index is now just 60 points shy of its high for the year in early February.

JPMorgan Chase beat estimates with first-quarter profit rising 52 percent, while Wells Fargo bank and Citigroup also exceeded analysts’ expectations for earnings.

The results indicate that the turmoil in the US banking sector last month had little immediate effect on the profitability of Americas biggest companies which largely benefited from the inflow of deposits from smaller regional banks.

Adding to the positive sentiment, stocks were boosted by lower producer prices and higher jobless claims than expected; two signs of a cooling US economy.

However, investors digested a fresh batch of economic data that showed retail sales fell 1 per cent in March, more than estimated, while Americans’ surveyed raised their inflation expectations for the year ahead.

Analysts said the latest data painted a conflicting picture.

On the one hand, an array of leading indicators are pointing to a US recession over the coming year, but with unemployment at its lowest level in decades along with growing signs that inflation is softening and the Federal Reserve is nearing a pause in rate hikes investors are unlikely to become too pessimistic – though there is a growing likelihood the expected pause may still be some months away.

Fed governor Christopher Waller signalled he backs another rate rise adding to the debate among US central bank officials over whether to pause the tightening cycle or push ahead with one additional rate rise. Waller said the turmoil sparked by the bank crisis had not led to a significant tightening of credit conditions and inflation remained elevated enough to warrant further tightening, though he would be guided by the data.

“While we think there are plenty of positives in the March inflation data, we are hesitant to place too much emphasis on any one month of data, particularly given past head fakes,” Bank of America analysts wrote on Friday.

“Core CPI inflation is still running at 5.1 percent annualised over the last three months and 4.6 per cent over the last six months, which are well above the levels consistent with the Fed’s 2 per cent PCE inflation target.”

Investors are pricing in a more than 80 percent chance that the Fed will raise rates by 0.25 percentage points at its next meeting in early May rather than leave them unchanged, and roughly even odds that the European Central Bank will choose to raise rates by half a percentage point over a quarter percentage point rise.

Gold last week reached its highest price since March 2022 trading at US$2048oz.

Year-to-date the gold price is up 10 percent, while Brent Crude Oil futures gained a further 2 percent for the week, and more than 8 percent for the month-to-date, closing at US$86.40

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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