Markets ramp up bets on likely rate cuts next year as US inflation eases
With just six weeks remaining until the end of the year, markets globally have already concluded that central banks are done with hiking interest rates – particularly in the US after inflation eased for the first time in four months – and will likely announce rate cuts in 2024. That’s if the surge in equity valuations in recent weeks is to be believed .
The only question on the cuts seems to be by how much and how often they’ll be.
Right now speculating on the likely path for interest rates next year is certainly the hot topic of debate amongst central bankers, economists, analysts and commentators. At this point the emerging consensus is that central banks will be forced to switch gears in order to avoid the global economy falling into a recession as the cumulative impact of their aggressive rate hikes continues to slow activity.
But the simple fact remains that no one really knows, with any degree of certainty, how next year is going to pan out, particularly given the multiplicity of scenarios and economic variables in play.
Strategists at UBS Investment Bank released their latest forecast last week predicting the US Federal Reserve will cut interest rates almost four times more than what markets are pricing. And not only that, but the continued decline in inflation will enable the central bank to start easing policy as soon as March, and in big chunks according to the global investment bank.
“Inflation is normalising quickly,” UBS’s Bhanu Baweja said. “By the time we get to March, the Fed will be looking at real rates which are very high.”
RBNZ prepares to release final MPS next week
The countdown is underway for the Reserve Bank’s final monetary policy statement of the year next week and investors will be hoping (though probably unlikely) Governor Adrian Orr might at least offer some thinly veiled hints if and when interest rate cuts could be in store next year.
Given the RBNZ was one of the world’s first central banks to begin hiking interest rates will it therefore be the first to begin cutting them?
But not everyone is convinced cuts are on the horizon anytime soon.
In ANZ’s latest economic forecast chief economist Sharon Zollner believes talk of interest rate cuts is premature, even going so far as to suggest the RBNZ could well resume hiking in February.
“Recent data confirms that monetary policy is working, with aggregate supply and demand coming back into balance perhaps a little faster than we previously expected. Yet the inflation-fighting job remains far from done.”
In particular, Zollner said there were several key data points she will be paying attention to in the new year, while noting that surging migration continues to “mask” the weakness that will be more evident in per capita spending as people continue to “watch their pennies”.
“We’ll be looking out for more evidence on the demand impact of migration, particularly on the housing market (rents and house prices), whether our commodity prices are going to continue to lift – or slump once more, whether the improvement in business sentiment seen over the year continues, or whether the lagged impacts of monetary policy mean the shoe is about to drop.”
Also key to the economic outlook is unemployment where Zollner is already raising concerns.
“We see the unemployment rate continuing to rise. The agricultural sector is contending with a significant reduction in incomes with export prices low and operating costs (including interest costs) trending higher.”
Across the Tasman, the Reserve Bank of Australia resumed its tightening cycle earlier in the month after pausing for two consecutive meetings. While Aussie inflation remains persistent it seems further rate hikes are not yet set in stone according to the RBA’s latest MPS.
In the US with ‘Team Recession’ in retreat, it’s not just Wall Street that’s hopeful Federal Reserve Chair Jerome Powell has accomplished his much talked about ‘soft landing’ outcome. The head of the world’s largest retailer has warned consumer prices could soon begin to drop.
“We may be managing through a period of deflation in the months to come,” Walmart Chief Executive Officer Doug McMillon said during the company’s earnings call last week.
The company’s shares slid more than about 8 percent on the forecast.
The big-box retailer struck a cautious tone with its outlook after it saw consumer spending weaken at the end of the period. Prices of some grocery items remain higher, but they have fallen for dairy, eggs, chicken and seafood, McMillon said on the company’s earnings call. He added that relief is coming for customers as they look for holiday gifts.
Meanwhile, the economic outlook for a battered Argentina is far more complicated. The outcome of its presidential election will be announced in the next 24 hours as the country grapples with triple-digit inflation, a plummeting currency and a possible sixth recession in a decade.
US stocks surge on lower inflation data while NZ market all but wipes out earlier gains
After initially joining in the global rally in stocks following better than expected inflation data in the US had pushed the NZX50 up by as much as 2 percent, the early gains subsequently faded by the close of trade on Friday leaving the index up just 0.2 percent for the week.
US inflation fell more than expected to 3.2 percent in October, the first decline in four months, prompting Treasury yields to fall sharply and stocks on Wall Street to climb.
The benchmark S&P500 index climbed almost 2 percent on the news, it’s biggest one day jump since April, while the tech-heavy Nasdaq composite index surged 2.4 percent for the week.
Locally, shares in Mainfreight climbed more than 15 percent for the week as investors piled back into the stock on positive economic data out of both the US and China.
Also benefiting from better than expected economic data out of China, shares in a2 Milk rebounded more than 4 percent after slumping to a six year low of $4.00 earlier in the week.
At it’s annual meeting on Thursday managing director and chief executive David Bortolussi assured shareholders the company remained on track to reach its sales target of $2 billion by 2026 but said there had been no change to its 2024 earnings outlook.
Bortolussi said the dairy and infant milk formula marketer was also on track to improve medium-term Ebitda (earnings before interest, tax, depreciation and amortisation) margin into the “teens”.
In the June year just concluded, a2 Milk’s net profit jumped by 26.2 percent to $144.8 million and after an on-market share buyback of $149.1m, the company still had $757.2m in the bank.
Bortolussi said the key challenge for a2 Milk and its competitors was the infant formula market in China declining – down double digits in 2023 – due to the cumulative impact of fewer newborns and lower market pricing.
Oil price slump provides some welcome news for motorists
After hitting US$96 a barrel in mid-September oil prices slumped to their lowest level in four months last week as investors worried about global oil demand following weak data from the US and Asia.
Brent crude oil futures ended the week at $80.55pb after trading below $US77bp earlier in the week which saw the price of 91 petrol fall.
“The mood is negative as are the charts” one analyst told Reuters.
“It’s going to take something to change that mood, and until then people will ride it down until they realise it’s overdone.”
The number of Americans filing new claims for unemployment benefits increased to a three-month high last week, suggesting that labour market conditions continued to ease, while spending on motor vehicle purchases in the US in October also fell.
On the flip side, Chinese economic activity rallied in October as industrial output increased at a faster pace and retail sales growth beat expectations suggesting oil prices might be nearing a temporary low.
This week’s OPEC+ meeting, where Saud Arabia, the world’s largest oil producer, is likely to extend existing supply cuts, may lead to prices reversing course.
Prosecutors push for Samsung chief to serve jail time
South Korean prosecutors are seeking a five-year jail term for beleaguered Samsung chair Lee Jae-yong over charges of accounting fraud and stock manipulation connected to the controversial 2015 merger of two of the group’s units.
Prosecutors allege that Lee, who was vice-chair of Samsung Electronics in 2015, was among a group of executives who inflated the stock price of Cheil Industries, a textile company, and devalued Samsung C&T, a construction and engineering business, during the merger to help cement the billionaire scion’s control of the conglomerate.
They claim that Lee’s alleged stock manipulation inflicted losses on shareholders of Samsung C&T. Lee, the grandson of Samsung founder Lee Byung-chul, is also accused of orchestrating a $3.9b accounting fraud at the group’s biopharmaceutical unit in 2015 as part of the same case.
“The defendants undermined the foundation of the country’s capital markets to smooth the leader’s succession,” the prosecutors said on Friday.
Lee has denied any wrongdoing during the three-year trial, claiming the merger and accounting process were part of the group’s normal business activities.
In 2017, the tycoon was convicted of bribing then South Korean president Park Geun-hye in a separate case relating to the same merger. He spent 18 months in jail until he was approved for parole by Park’s left-wing successor Moon Jae-in in 2021.
Coming up this week…
Monday
- Overseas Trade (Oct) – Stats NZ
Tuesday
- Task Group Holdings AGM
- Vital AGM
- New Vehicle Registrations (Oct) – Stats NZ
- Credit Card Spending (Oct) – RBNZ
Wednesday
- Oceania Health Full Year Result
- Scott Technology AGM
Thursday
- My Food Bag Full Year Result
- AFT Pharma Full Year Result
- Tower Group Half Year Result
- Rakon Full Year Result
- Pacific Edge Full Year Result
- Goodman Property Trust Full Year Result
- Delegat Group AGM
- Enprise Group AGM
- Allied Farmers AGM
Friday
- Warehouse Group AGM
- Retail Trade Survey (Sept Qtr) – Stats NZ
- New Residential Mortgage Lending (Oct) – RBNZ
