A trading update at its annual meeting from transport and logistics heavyweight Mainfreight provided a stark reminder that higher interest rates are beginning to take a toll on business results just weeks away from the start of the August earnings season.

After a global freight boom that delivered two years of bumper results, the company said earnings for the June quarter fell 43 percent to $83.1 million versus the same period a year ago. Deteriorating freight volumes, which saw both its Americas and Asian operations hit hardest, were largely to blame for the weaker than expected result.

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The company’s US operations recorded a dramatic 81 percent slide in profit before tax to US$6.1m (NZ$9.8m) from US$164.8m in revenue previously, while Asia followed suit with a 55 percent drop for the quarter to US$3.6m (NZ$5.9m). Australia fared best during the quarter, declining 7 percent to A$27.3m (NZ$29.6m), while Mainfreight’s domestic operations saw profitability decline 18 percent to $27.8m.

Total group revenue was $1.2 billion, down 19 percent. The biggest drag on profitability was the air and ocean division which saw revenues slump 41 percent to $451m, while pre-tax profit was $37.4m, down more than 50 percent on the prior year.

Managing director Don Braid, who warned of a slowdown in May, said the company had imposed a hiring freeze and planned to do “more with less”.

Speaking at the group’s AGM, Braid said the response to the tougher trading environment would also incorporate reduced sea and air freight rates and an increased focus on its “top earners” across DIY, beverage, food, retail and perishables businesses. Additionally, continued growth and expansion would remain a priority for the business.

Braid said the momentum generated from two years of Covid logistics congestion would provide the foundation to invest a further $676m in capital expenditure through to the end of 2025, mainly on property investments and upgrades, the majority of which would be in NZ and Australia.

Mainfreight’s share price fell 4.2 percent for the week to close at $67.99.

NZ sharemarket fails to join global rally in stocks

A subdued NZ sharemarket ended the week barely changed despite global equity markets continuing to push higher as local investors reassessed their outlook for stocks in the face of growing economic headwinds.

The NZX50 closed at 11,947 after once again failing to push through the 12,000 level which continues to present strong resistance to any further upside after multiple attempts by the index to break higher.

The market’s mood was further soured by the latest ANZ-Roy Morgan Consumer Confidence Index falling in July. A net 39 percent of respondents said it’s a bad time to buy a major household item – a 12-point fall and nearing previous lows for purchasing decisions.

ANZ Research warned the data indicated a slowdown in consumer spending is now under way and was likely to have some way to run, given the Reserve Bank views it as a prerequisite for bringing inflation sustainably back down to target.

Shares in beleaguered cancer diagnostics company Pacific Edge remained under pressure falling 25 percent to 12.9c after the Medicare contractor Novitas reiterated the Cxbladder testing was “not considered medically reasonable and necessary”.

However, Novitas is allowing Pacific Edge and other affected companies to respond to its latest local coverage determination within 45 days, along with a public meeting to be held on 11 August.

Across the Tasman, Australia’s ASX200 index gained 1.2 percent to finish at 7404.

In the US the benchmark S&P500 index gained a further 1 percent for the week after the Federal Reserve’s preferred measure of inflation fell to its lowest level since the start of the coronavirus pandemic, thereby lowering the chances of another interest rate rise in September. Separate data showed US wage growth increased at a slower than expected pace in the second quarter.

Meanwhile, US gross domestic product for the second quarter increased 2.4 percent, better than the market expectation of 2 percent, suggesting further interest rate hikes aren’t completely off the table.

The tech-heavy Nasdaq Composite gained 2 percent for the week and is now just 6 percent below its November ’21 peak of 16,765.

Personal consumption expenditures in the US rose at an annualised pace of 3 percent in June, down from 3.8 percent recorded in May. It was also the index’s lowest level since March 2021.

The annualised increase in the “core” PCE index — which strips out volatile food and energy prices and is also closely watched by policymakers — eased more than expected to a 20-month-low of 4.1 percent. Goods prices came in 0.6 percent lower than last June, a welcome sign of continued deflation in the economy.

The flurry of data helped boost hopes that inflation will return to the Fed’s 2 percent target without the need for further rate hikes after the Fed, as expected, lifted interest rates to a 22-year high with the Federal Funds Rate now between 5.25 and 5.5 percent.

US government bond prices also rose, with the yield on the two-year Treasury falling 0.06 percentage points to 4.88 per cent, while the yield on the 10-year note fell by 0.06 percentage points to 3.95 percent after spiking back above 4 percent earlier in the week.

Investors also grappled with the Bank of Japan’s decision to ease controls on its government bond market. Policymakers, in effect, widened the trading band on long-term yields after saying they would offer to buy 10-year Japanese government bonds at 1 percent in fixed-rate operations. The BoJ said its previous 0.5 percent cap on those yield was now a “reference” rather than a “rigid limit” and that it would use bond purchases to stop yields climbing above 1 percent.

As a result, the 10-year yield on Japan’s government debt climbed to a nine-year high of 0.57 percent.

As expected, the European Central Bank lifted interest rates for the ninth successive time, by 0.25 percentage points to 3.75 percent, in an effort to tame the region’s stubborn price pressures.

While policymakers left the door open for more tightening, the majority of investors bet that rates would remain unchanged at the ECB’s next meeting in September, according to data compiled by Refinitiv and based on interest rate derivatives prices.

Rising oil prices risk creating new inflationary headwind

Despite fears of a global recession and a subdued economic recovery in China dampening prospects for energy demand, global oil prices have jumped more than 16 percent since late June generating the longest rally since before Russia’s full-scale invasion of Ukraine upended energy markets.

Announcing its latest forecasts, the International Energy Agency says global oil demand is expected to rise by 2.2 million barrels per day to a record 102 million this year. However, global oil production is forecast to rise by only 1.5 million barrels per day to 101.5 million, according to its latest report.

The agency says the supply ‘gap’ has been exacerbated by production cuts from OPEC+, an alliance of the world’s major producers.

The group, which includes the Organization of the Petroleum Exporting Countries, Russia and other smaller producers pledged in April to slash output by more than 1.6 million barrels a day through to the end of the year in response to an almost 38 percent drop in oil prices from their peak last year.

“The recent price uptick has been driven primarily by OPEC+’s voluntary production cuts announced in April,” Giovanni Staunovo, a strategist at investment bank UBS, told CNN.

Staunovo said additional voluntary cuts announced by Saudi Arabia — the world’s biggest exporter of crude oil — earlier this month would further tighten oil markets leading to the likelihood of further price rices.

Markets are also reassessing their earlier gloomy forecasts for oil demand with oil traders increasingly betting that resilient economies will translate into robust demand, and that, with interest rates nearing their peak, the outlook for growth could significantly improve in the coming months.

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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