New Zealand’s first quarterly economic report card for the year is due out this Thursday and don’t be surprised if it reveals the country has entered a ‘technical’ recession … or barely avoided one.
Kiwibank chief economist Jarrod Kerr is among those picking a flat result for the March quarter GDP print, but only by the narrowest of margins.
“Economic activity contracted by 0.6 percent in the final quarter of 2022. We expect that to be followed by a flat GDP print in Q1.”
Key measures of economic activity paint a mixed picture, he says. “The Reserve Bank’s ongoing battle with inflation saw an aggressive rise in interest rates, while domestic demand is beginning to respond. But complicating Q1 was not only the severe weather events, but also the ensuing rebuild. We could also be in for some payback from Q4’s big decline. There’s lots to consider.”
The Reserve Bank’s latest forecast from its most recent Monetary Policy Statement is for quarterly GDP to rise by 0.3 percent.
But given the significant uncertainty over the quarter as a result of devastating weather disruptions earlier in the year, it’s possible the quarterly figure could well surprise either way.
“What’s important is the outlook, and that is soft at best,” says Kerr, in a preview of this week’s announcement.
“Our base case still involves NZ slipping into a (shallow) recession later this year. The Reserve Bank’s sheer determination to constrain demand cannot be discounted. However, the rebuild and surge in net migration questions the magnitude of the contraction and the starting point.”
No respite for local investors despite US markets returning to bull market territory
It was another tough week for local investors after the New Zealand sharemarket recorded its third biggest fall of the year just a fortnight after falling 2.4 percent at the end of May.
The NZX50 ended the week down 1.6 percent to close at 11,690, a 10-week low, after falling through 11,800, a level it had held since early April.
A late rebound in Auckland Airport shares after Auckland Council voted to sell less than half the number of shares it had previously proposed avoided an even bigger fall for the local market.
By contrast, investors in the US had reason to celebrate a milestone few would have expected at the start of the year after the benchmark S&P500 index returned to bull market territory for the first time since 2021 following a gain of more than 20 percent since its low point last October.
And for tech investors, the performance has been even better with the US tech-heavy Nasdaq index up more than 35 percent since its October low.
By comparison, the local market has recorded a much more subdued 8 percent advance for the NZX50 over the same period, while Australia’s ASX200 index has gained 11 percent.
As mentioned last week, a small group of high profile US tech stocks including Meta (Facebook), Alphabet (Google) and Microsoft, which all stand to benefit from the growing exuberance over artificial intelligence, continue to power US markets higher.
But not everyone is convinced this really is the start of another bull market.
The widening disconnect between stocks and bonds suggests a 20 percent downside risk for equities if bonds are proven correct in pricing inflation volatility, according to modelling by strategists at US investment bank JPMorgan Chase.
“Bond markets are still pricing in a sustained period of elevated macroeconomic uncertainty, even if there has been some modest decline over the past three months,” the influential banking giant wrote in a note to its clients last week.
“By contrast, US equity markets look ‘priced for perfection’ with the S&P now above a fair value estimate looking through the rise in macroeconomic volatility since the pandemic.”
JPMorgan’s viewpoint highlights the degree of divergence between competing outlooks and the extent to which investors across different asset classes are struggling to make sense of the market landscape since the pandemic.
That divergence was on full display this past week, with the S&P500 entering a bull market just as bets firm for another Federal Reserve rate hike in July and after central banks in Australia and Canada wrong-footed traders with unexpected rate hikes.
Earlier in the year markets were fretting about the risk of further rate hikes and the damage this would inflict on economies. But those concerns have largely been brushed aside given better than expected company earnings results and continued consumer resilience that has surprised everyone.
Investors have also been blindsided in currency markets as the US dollar has largely maintained its strength, going against expectations for the greenback to lose momentum as the Fed’s tightening cycle peaks. A gauge of dollar strength gained 1.6 percent in May, its biggest for the same period since 2018.
In China, instead of becoming a growth driver in Asia after pandemic restrictions ended, stocks have tanked and continue to lose ground after figures released in April showed economic growth remains subdued.
Yet despite the multiple cross currents investors are currently enduring, they appear to be taking it all in their stride. The Volatility Index, often referred to as Wall Street’s ‘fear gauge’, fell to its lowest level since the onset of the panic over the coronavirus pandemic three years ago.
Pacific Edge shares plunge 80% following major customer loss
Shares in Dunedin-based bladder cancer diagnostics provider Pacific Edge plunged 80 percent for the week to just 10 cents after a US Medicare provider said it would no longer cover the use of the company’s flagship Cxbladder test.
US firm Novatis has decided to withdraw Medicare health insurance reimbursement for the cancer test, which it said was “not considered medically reasonable and necessary”.
The US sales of the CX test accounted for around two-thirds of Pacific Edge’s income.
It’s an unfortunate blow for a business that has long been touted as one of the country’s few medical technology success stories.
While the company said a revision of the decision could be applied for, industry feedback suggested the probability of this occurring was very unlikely.
Last month Pacific Edge reported an increased loss of $27m as it invested in marketing and development, but also reported strong growth in sales of the CX Bladder test.
Chairman Chris Gallaher said the company remained well funded with cash and cash equivalents and short-term deposits of $77.8 million at the end of March 2023.
“Despite this current setback, the company believes that it can still deliver on the significant opportunities we see for Cxbladder in the US and around the world. We will update the market as we gain greater clarity and have determined our strategic path forward.”
Synlait shares rebound on positive reregistration decision
Synlait Milk shares finished the week with a gain of more than 10 percent to close at $1.75 and its bond yield eased after receiving confirmation it can continue manufacturing A2 Milk infant formula for sale in China.
The shares had been under pressure in recent months, falling as low as $1.41, pending a decision from Chinese authorities for the company to gain reregistration of its export licence.
A2 shares initially benefited from the decision gaining more than 8 percent but ended the week down 5 percent at $5.74.
The company said the green light will allow it to keep producing the A2 Milk product at its Dunsandel factory, near Christchurch, until September 2027.
“The re-registration is a very important milestone and we have worked hard together to ensure its success,” said Synlait’s chief executive, Grant Watson.
A2 Milk said it expects Synlait to start producing the newly registered product this month for distribution to market in the first half of the June 2024 year.
US, Japan and European Central Banks rate decisions this week
The US Federal Reserve’s latest meeting this week could spur fresh gains — or confirm investor jitters.
While the world’s most influential central bank is widely expected to hold interest rates steady for the first time in more than a year when it meets this week, futures markets suggest a further quarter-point rate rise in July has already been priced in by markets following a series of bumper economic reports recently.
Investors have yet to decide whether stronger data boosts the soft-landing scenario or sparks fresh worries that an over-hawkish Fed will push the economy into recession.
Meanwhile, Europe’s economy contracted slightly at the end of last year and beginning of 2023, revised figures showed, underlining the impact of the loss of Russian natural gas and high inflation on consumer spending.
Economic output in the 20 countries that use the euro currency fell 0.1 per cent in both the final three months of 2022 and first three months of this year from the previous quarters, according to the European Union’s statistics agency Eurostat.
That means the eurozone endured two consecutive quarters of decline, thereby meeting the definition of a “technical” recession.
However, the economists on a panel that declares eurozone recessions use a broader set of data, including unemployment figures. European labour markets have held up to recent economic shocks: unemployment is at its lowest level since before the creation of the euro in 1999, hitting 6.5 per cent in April.
As a result, the European Central Bank is expected to continue its series of rate increases at its meeting this week and keep the door open to raise further beyond that.
In Japan, a fresh bout of weakness in its currency has led some market watchers to predict more sizeable interventions by the country’s central bank when it meets this week as it persists with its ultra-dovish policy in a world of high rates and high inflation.
The Japanese yen has been sliding toward levels that last prompted government officials to take action to support the currency. This as foreign investors enjoy a rally in Tokyo stocks, thanks to the cheaper exchange rate.
Both the Reserve Bank of Australia and the Bank of Canada surprised markets with unexpected rate hikes last week.