The Reserve Bank is widely expected to hike the official cash rate a further 25bp this Wednesday – but there remains an outside possibility it may surprise with another double hike, just as it did in April.

New data showing immigration surging together with a freshly minted Government budget that includes a large pipeline of new infrastructure spending initiatives aimed at repairing extensive flood damage earlier in the year is not a combo the Reserve Bank will be welcoming right now.

While a hike this week is almost a foregone conclusion, it will be the bank’s forward guidance that will once again be the centre of attention.

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Kiwibank chief economist Jarrod Kerr believes the central bank will seek to deliver a two-pronged message this week.

“Firstly, the Reserve Bank may highlight the risk of further tightening, if needed. They could do this by lifting the OCR track to incorporate some probability of future rate hikes. For example, they could lift the peak in the OCR track from 5.5% (currently), to 5.65% (or thereabouts) to show a 50% chance of another 25bp move. That would put a bit of a floor under short-dated wholesale (and therefore retail) rates.

“Secondly, they will look to remove (postpone) rate cut expectations. Again, the Reserve Bank’s OCR track will highlight no cuts until late in 2024. They could keep the same outer trajectory as they delivered in February. Removing rate cuts is like delivering a rate hike.”

Markets would not like that given rate cuts before the end of the year are largely already baked in to current pricing.

Kerr admits though that even he has been surprised by the migration windfall.

“Huge waves of net migration have huge impacts on the economy. While they help to deal with labour shortages and put downward pressure on wages, more people generate more demand, for everything. We need more houses, more infrastructure, and more spending on education and health.

While net migration booms are generally seen as a net-positive for demand, by implication they also add to inflation.”

ANZ chief economist Sharon Zollner also believes the Reserve Bank may not be done with rate hikes after this week.

“On balance, we see the risks skewed towards the Reserve Bank sooner or later deciding more is needed to get inflation down, but downside risks have certainly not gone away – and indeed arguably grow in that scenario.”

While updated Treasury forecasts released to coincide with the Budget show that the Government’s plans for significant spending on infrastructure will likely mean the country avoids a recession this year, that scenario may well turn out to be optimistic if higher interest rates are needed to return inflation to the RBNZ’s target band of 1-3 percent.

Reserve Bank Governor Adrian Orr once again faces another difficult balancing act this Wednesday.

NZ sharemarket closes at 3 month high after positive earnings results

After being stuck in a 200 point trading range since early April, the NZ sharemarket finally broke free on Friday gaining more than 1 percent to record it best week since late March after solid earnings results surprised on the upside.

A better than expected full year result from retirement village operator Ryman Healthcare, which saw its shares gain more than 8 percent on Friday, was responsible for much of the market’s strong performance.

Ryman reported an underlying profit of $301.9 million, up 18.4 percent (vs. guidance of $280-290 million) which the company said was driven by strong resale margins and a growing contribution from its Australian business.

Investors also responded positively to news that the company’s gearing of 33.1 percent was now well down from the 45.3 percent it reported for September 2022 and in line with its medium-term target of 30-35 percent.

Ryman Group chief executive Richard Umbers said the company was aiming to achieve positive free cash flow by the 2025 financial year.

“As signalled in our strategy, we have reprioritised our development programme over FY24 and FY25. We are also taking steps to refocus our future pipeline on lower density villages with lower peak debt and an improved cashflow profile.”

In its announcement, Ryman also indicated it would consider reinstating dividend payments next year.

Disruptors recover

Earlier in the week shares in online travel software provider Serko surged almost 30 percent after the company reported a 154 percent lift in revenue to $48 million, thereby reducing its net loss by 15 percent to $30.5m for the year ending March. Serko is forecasting revenue to be in the range of $63-$70m next year.

Boosted by its partnership with global online accommodation website, Serko said that business travel demand is tracking strongly, with online bookings increasing 93 percent to 4.1m, from 2.2m. It reported cash reserves of $88m and said its average monthly cash burn has fallen from $3.3m to $2.7m.

My Food Bag shares gained 2.5c to close at 21c despite reporting a 61 percent fall in net profit to $7.85m on revenue of $175.69m, down 9.4 percent, for the 12 months ending March.

The downbeat result had previously been flagged in an earlier trading update.

The meal-kit company blamed the poor result on a combination of growing inflationary pressure being faced by households and low consumer confidence which had resulted in subdued demand.

The company, which listed in March 2021 at $1.85, also announced plans to delist from the Australian Securities Exchange due to low daily trading volumes on the exchange and to reduce costs.

Companies reporting this week include: Infratil (today), Sanford (Tuesday), Mainfreight (Thursday) and F&P Healthcare (Friday).

US debt ceiling negotiations go down to the wire

Stocks on Wall Street erased earlier gains on Friday after US policymakers paused negotiations over the debt ceiling deal, while nervousness over the health of the US regional banking sector returned to spook markets once again.

Investors also lowered their expectations that the Federal Reserve would raise interest rates in June after chair Jerome Powell warned tighter credit conditions – the result of the recent banking turmoil – may mean the Fed will not have to raise interest rates as high to reach their intended 2 percent inflation target.

Following Powell’s comments, pricing in the futures market showed investors were only betting on a 21 percent chance the Fed would raise interest rates again at its meeting in June. Earlier Friday, those expectations had been around 40 percent.

Meanwhile, after earlier expressing optimism about being able to conclude a deal to raise the debt ceiling by weeks end, Republican lawmakers walked out of negotiations on Friday.

House of Representatives Speaker Kevin McCarthy warned of “serious differences” between the two sides.

Speaking to reporters in Washington over the weekend, McCarthy accused the White House of moving “backwards” in the negotiations over a budget pact, dashing hopes of a breakthrough that could soothe markets before they open for the week.

“It’s very frustrating. If they think we’re going to spend more money next year than we did this year that’s simply not going to happen.”

The White House also acknowledged the two sides remain still some way from an agreement.

Speaking earlier at a news conference in Hiroshima, Japan, where President Joe Biden attended the G7 summit, press secretary Karine Jean-Pierre said: “We have serious differences. And this is going to continue to be a difficult conversation. That’s not lost on us.”

In exchange for support to raise the debt ceiling, Republicans are demanding budget cuts to the tune of US$4.5 trillion, which includes scuppering several of Mr Biden’s legislative priorities.

The White House has called the Republican proposal “a blueprint to devastate hard-working American families”, although it has indicated that it may be willing to make some budgetary concessions.

With the clock ticking, the US Treasury Department has already warned that a default could begin as early as next week which would plunge markets into a crisis on a scale few would dare to contemplate.

US regional bank stocks also stumbled on Friday after CNN reported Treasury secretary Janet Yellen told bank chief executives this week that more mergers in the sector may be necessary in the near future.

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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