The Reserve Bank’s latest Monetary Policy Review on Wednesday has the potential to deliver a few surprises, though there is plenty of debate as to what those surprises might entail for investors, mortgage holders and also depositors.
Economists have been weighing in with competing outlooks after the better-than-expected economic growth that saw Q2 GDP at 0.9 percent, well above consensus forecasts of a 0.4 percent lift, and an upwardly revised Q1 result that confirmed the economy hadn’t been in recession after all.
As a result, ANZ Bank economists are fully expecting a “hawkish tilt” this Wednesday and are sticking to their view that the central bank will deliver an unwelcome Christmas surprise for mortgage holders before the end of the year – though savers won’t be complaining.
The bank said in response to last week’s GDP data: “While the data alone doesn’t provide much indication of how much inflation pressure is still in the pipeline, it does support our view that a hike is likely in November.”
BNZ is hugging the centre line saying the RBNZ should “play a straight bat” this Wednesday arguing that with competing tensions between a labour market that is easing and a housing market reviving, as well as the uncertainties surrounding the upcoming election, the Reserve Bank should “acknowledge the risks that pervade the economy but produce a steady as you go conclusion”.
Meanwhile, Kiwibank is firmly in the camp that the Reserve Bank’s work is done and no further rate hikes are necessary. “If households spend less, which is what we are seeing, and businesses pull back on their hiring and investment, which is what we’re hearing, then the economy will contract harder.”
Westpac believes the big concern is how fast the current red-hot inflation pressures will ease, particularly as the oil price continues to edge ever closer to US$100 a barrel.
“Importantly, it looks like the risks on this front are becoming tilted towards more persistent price pressures, with the housing market turning up and population growth at historic high levels.” It says the various gauges of wage and price pressures will be key to determining the RBNZ’s monetary policy approach from here, therefore it questions whether it’s a case of “higher or just longer?”
In a similar vein, ASB Bank says the resilience of the Q2 GDP print could make the RBNZ question whether it’s done enough, despite the 525bps of monetary tightening it has already delivered so far. “In any case, it does raise the risk that interest rates will [have to] remain higher for longer.”
The Reserve Bank’s monetary policy committee continues to walk a tightrope as it juggles competing pressures between managing inflation and sustaining enough economic momentum to avoid a recession. This Wednesday will reveal how far along that interest rate tightrope it is willing to venture.
NZ sharemarket continues to weaken as investors increasingly move to the sidelines
The NZ sharemarket, like most others around the world, continued to lose ground, falling to an 11-month low of 11,178 at one point last week before rallying somewhat on Friday as traders squared off their books for the end of the quarter.
Global equity markets face an upsurge in global oil prices, persistent trouble in the Chinese property sector and the likelihood of fewer interest rate cuts next year.
For the week the NZX50 fell 0.7 percent, while for the month of September it lost 2.2 percent and for the quarter suffered a loss of 5.2 percent, its worst quarterly result since June last year. Highlighting the extent of the market’s negative tone, over the last 11 weeks the NZ market has only managed to finish with a weekly gain of more than 0.5 percent just the once.
The Warehouse Group said a drop in gross margins and rising costs were behind a 67 percent plunge in its full-year net profit, though the result had previously been signalled to the market earlier in the year.
Describing it as a “tough year for both us and our customers”, chief executive Nick Grayston said weak consumer confidence had seen a shift in spending, especially for big-ticket items, travel and entertainment.
Group revenue for the year lifted slightly to $3.4b from $3.29b previously, though underlying net profit fell to $37.5m versus $85.5m in 2022. Sales at the company’s Red Sheds rose 9.6 percent, while sales fell for the other main brands with Torpedo7 the group’s weakest performer.
The latest ANZ Business Outlook Index rose to 1.5 in September 2023 from -3.7 in August, turning positive for the first time since May 2021, though the report continued to highlight several activity indicators that remained weak despite the lift in the headline measures. Export (-0.4 in Sept vs 7.5 in Aug), investment (-4.1 vs -1.3) and employment intentions (1.2 vs 4.6) all showed a continued deterioration, and construction intentions, both residential (-13.6 vs -7.4) and commercial (-29.6 vs 0), also eased.
The results of the latest NZIER Quarterly Survey of Business Opinion on Tuesday will be closely watched ahead of the Reserve Bank’s latest Monetary Policy Review on Wednesday.
US consumers beginning to show signs of buckling
In the US, there are growing signs of a new fear slowly creeping in among hedge funds and real-money investors who have recently begun to pare back their equity exposures: that the once-fearless US consumer is beginning to buckle, with used-car dealers and major retailers issuing warnings on their earnings trajectories.
However, if there is a silver lining to the prospect of a full government shutdown and ongoing labour strikes it’s the likelihood both will keep financial conditions tight which would aid the Fed’s bid to curb price pressures. And there was more good news on that front on Friday when data showed the Fed’s preferred measure of underlying inflation rose at the slowest monthly pace since late 2020.
US core personal consumption expenditures fell from 4.3 percent in July to 3.9 percent in August, the lowest level in almost two years for the inflation gauge, which is closely watched by policymakers. Still, the real dilemma facing the Fed is that though inflation is continuing to decelerate, core PCE remains almost double its 2 percent target, prompting the need to keep the possibility of another rate hike in play.
US equity markets remained downbeat with the benchmark S&P500 falling 0.7 percent for the week, 4.9 percent for the month and 3.6 percent for the quarter. It was the worst month for stocks this year as investors continued to focus on the inflationary impact of rising oil prices and the 10-year Treasury yield which climbed to 4.6 percent last week. For the quarter, Brent Crude Oil futures rose 23 percent while the 10-year Treasury yield gained almost 20 percent trading above 4.6 percent last week for the first time since 2007.
Meanwhile, the billionaire chairman of beleaguered property developer China Evergrande Group is now said to be under “residential surveillance” after being taken away by Chinese police earlier this month. The move against Hui Ka Yan is leading the saga at the world’s most-indebted developer further into the realm of the criminal. Earlier this month authorities confirmed they had detained some staff at its wealth management unit, and two former executives were also reportedly being held for questioning.
US consumers combine gold purchases with grocery shopping
Gold suffered its biggest monthly fall since February as the prospect of more interest rate hikes by the Federal Reserve had investors selling their holdings in the precious metal.
Gold finished the month down 5 percent at US$1866/oz.
However, the weaker price doesn’t appear to have dented the appetite among US consumers to purchase the precious metal at one of America’s more unlikely outlets.
Retailing giant Costco said it was struggling to keep up with demand for the 1 ounce gold PAMP Suisse Lady Fortuna Veriscan bars, at US$1900 each.
Speaking on a recent quarterly earnings call, the company’s Chief Financial Officer, Richard Galanti, said the bars continued to be in hot demand and didn’t last long when in stock.
“I’ve gotten calls that people have seen online that we’ve been selling 1 ounce gold bars,” he said. “But once we load them on the site, they’re typically gone within a few hours, and as a result we’ve had to impose a limit of two per member.”
No word yet if Costco’s West Auckland branch plans to follow suit.
Coming up this week
- Building Consents (August) – Stats NZ
- NZIER Quarterly Survey of Business Opinion (QSBO)
- Reserve Bank Monetary Policy Review
- Global Dairy Trade Price Index
- Household Labour Force (Sept Qtr) – Stats NZ
- Residential Mortgage Lending (Aug) – RBNZ
- Dwelling & Household Estimates (Sept Qtr) – Stats NZ