Reserve Bank Governor Adrian Orr’s speech on Friday at the New Zealand Economics Forum hosted by the University of Waikato is likely to be closely scrutinised after surprising strength in employment data for the December quarter.
The stronger-than-expected data has quickly ignited speculation that the Reserve Bank may still have reason to hike the official cash rate when it announces its first monetary policy statement for the year at the end of the month.
The new figures showed unemployment rose to 4 percent last quarter versus the markets expectation of 4.3 percent, and quarterly employment growth came in at 0.4 percent against a forecast of 0.2 percent. To cap things off, the closely watched Labour Cost Index rose 1 percent for the quarter when the Reserve Bank had forecast a rise of just 0.8 percent.
ANZ economists sent a shudder through markets on Friday after changing their latest forecast track for the OCR suggesting the Reserve Bank still has more work to do to get inflation under control.
In what would be bad news for mortgage holders and borrowers more broadly who have been gearing up for interest rate cuts, ANZ is not ruling out the likelihood of 25 basis point hikes in February and April, which would take the OCR to 6 percent from its current level of 5.5 percent.
In addition, the bank has also pushed back its forecast for cuts from August to February next year.
“The RBNZ warned in November that if inflation pressures were to be stronger than anticipated, the OCR would likely need to increase further,” ANZ chief economist Sharon Zollner said.
“Data since then has been a series of small but consistent surprises in that direction.”
Describing February’s decision as a “line-ball call”, Zollner believes that if the Reserve Bank doesn’t hike in February then it may do so in April, unless economic data surprises meaningfully to the downside.
Markets reacted strongly to the data, with the bellwether two-year swap rate lifting by 10 basis points and the NZ dollar having its positive week of the year gaining 1.4 percent to close at 61.5 US cents.
In its analysis, ANZ also pointed out that though the data does paint a picture of a cooling labour market and an easing in non-tradable inflation, the improvement is “simply occurring too slowly”.
Given the tone of the November Monetary Policy Statement and comments by the Reserve Bank in a recent speech, “we think it is appropriate for the market to seriously ask whether the RBNZ might actually hike again”.
However, though BNZ economist Stephen Toplis believes the RBNZ is unlikely to be any less hawkish than it was when it presented its views in November, it is sticking with its ‘no-change’ call.
“We still believe the broad picture represents a general reduction in inflationary pressures and stress again that lags mean that the full impact of the last 250 basis points of tightening have still not been felt.”
Toplis also says that a high degree of uncertainty continues to surround the strength of the labour market.
“To start with, it seems highly unlikely employers, facing relatively weak demand conditions, will be able to continue absorbing the surge in immigration-driven labour supply.”
NZ sharemarket rattled by the prospect of further rate hikes
The NZ sharemarket cooled its heels somewhat on the hawkish outlook for interest rates finishing the week down 0.6 percent after recent gains that had seen the NZX50 index attempting to push through the 12,000 level where it has previously met resistance.
Earnings season will kick off this week as investors get to hear more details about the financial performance and outlook from around 60 listed companies in the coming weeks.
Though long-suffering a2 Milk investors finally have cause to smile once again with shares in the diary exporter up 24 percent year to date before its half-year results next Monday, the same can’t be said for Fletcher Building shareholders.
There will be a high level of frustration among investors after the company’s latest announcement that yet another round of cost blowouts on its SkyCity International Convention Centre project in Auckland along with its Wellington Airport parking building will affect its half-year results due to be announced this Wednesday.
In a statement, CEO Ross Taylor said a further $180 million would be set aside for likely losses resulting from the two projects while at the same time strongly denying speculation in The Australian that the company would soon be announcing a capital raise.
Fletcher Building shares slumped almost 8 percent last week after news of the new provisions to close at a three-and-a-half-year low of $4.16, bringing its year-to-date fall to 13 percent.
Retail stocks also remain under pressure with shares in The Warehouse Group closing at a new all-time low of $1.48 on Friday, and shares in KMD Brands (formerly Kathmandu) also closed at a new low of just 66c.
Wine producers are all feeling the pinch as a result of falling export sales. Shares in Delegat Group hit a seven-year low of $5.85 after trading above $15 three years ago, and shares in fellow producer Foley Wines fell more than 10 percent to close at a nine-year low of $1.05.
In the US, the benchmark S&P500 index pushed above the 5000 level for the first time to end the week at a new all-time high of 5025.
It’s been a spectacular run for America’s star-studded share index which has seen it gain more than 20 percent in less than four months after hitting a low of 4117 in late October.
In fact, demonstrating the underlying strength of the rally, in the 15 trading weeks since October 28 last year, the S&P500 has only had just the one losing week.
However, lurking in the background is a potential threat to the market’s current extreme optimism that is already raising eyebrows.
Bloomberg reported last week that a rapidly growing contagion in US commercial real estate as a result of falling demand for office space because of greater numbers of employees working from home is now rapidly spreading to Europe.
Adding to the problem, overseas property assets acquired by distressed Chinese developers are starting to hit the market in Europe and Australia. The country’s landlords and developers are deciding they want cash now to shore up domestic operations and pay off debts, resulting in significant numbers of vacant office blocks and associated distressed sales driving down valuations.
Completed commercial property deals worldwide sank to their lowest level in a decade last year, with owners unwilling to sell buildings at steep discounts. Regulators and the market are nervous that this logjam could be concealing large unrealised losses in commercial real estate in particular.
The resulting slump has seen investors pulling more than €1 billion a month from real estate funds in Europe.
Coming up this week
Tuesday
• Vulcan Steel – half-year result
Wednesday
• Fletcher Building – half-year result
• Electronic Card Transactions (Jan) – Stats NZ
• Selected Price Indexes (Jan) – Stats NZ
Thursday
• Skellerup – half-year result
• Vital Healthcare – half-year result
• International Migration (Dec) – Stats NZ
• International Travel (Dec) – Stats NZ
Friday
• Reserve Bank Governor to speak at the NZ Economics Forum, Hamilton
• Residential Mortgage Lending (Jan) – RBNZ
• National Population Estimates (Dec) – Stats NZ
