Business & Investing: Inflation, unknown to a generation of young people in many parts of the world and NZ, rears its head and central banks weigh their next moves
Last week’s surprise decision by the Reserve Bank to abruptly end its Large Scale Asset (bond buying) Program (LSAP) is the clearest signal yet the central bank considers the economy has almost fully recovered from the impact of Covid-19 and its previous stimulatory policy settings should be revised to reflect this.
Its next move is almost certain to involve raising the official cash rate (OCR), possibly as soon as next month. In doing so, NZ would become one of the first western countries post-Covid to experience rising interest rates.
The RBNZ’s decision to prematurely end its LSAP initiative was further vindicated on Friday with the latest consumer price index (CPI) for June coming in at 1.3 percent for the quarter, well above economists' expectations, and signalling inflation is beginning to accelerate. Annual inflation is now at 3.3 percent - the highest rate in over a decade.
However, as economists have pointed out, a jump in annual inflation from 1.5 percent at the start of 2021 was expected, in part because of the ‘base effects’ from last year’s lockdown-induced fall in prices. Overall demand in the economy has remained consistently strong since the end of last year’s Level 4 lockdown and this, combined with supply side constraints, including sourcing labour and materials, is leading to rapid price rises across the board.
It’s a similar story in the US where its consumer price index jumped by an annual rate of 5.4 per cent in June, fuelling worries that the world’s largest economy is overheating.
US Federal Reserve Chairman Jerome Powell was forced to defend his decision to ‘look through’ the current spike in inflation when he appeared before Congress last week. Powell pushed back against suggestions the central bank might be complacent about inflation risks, saying the Fed was ready to act if needed to tame prices and that he sympathised with public concern over rising prices.
“I know people are very worried about inflation,” Powell said. “We hear that loud and clear from everybody . . . it is really going through the economy and through every business.”
RBNZ governor Adrian Orr would likely have echoed those sentiments had last week’s Monetary Policy Review also involved a media conference.
Central banks globally are in a bind as they juggle near-term inflation pressures and long-term deflationary forces. Raise rates too early and you risk killing off the ‘green shoots’ of an early stage recovery. Leave rates unchanged too long and you potentially risk creating an inflation problem down the track.
‘Taking the punch bowl away just as the party is getting started’ is the metaphor often used to sum up the role of central banks. The dilemma Powell, Orr and their fellow central bankers face is the nature of the ‘party’ itself – is it likely to grow or, as Covid-19 continues to inflict its misery on the world, could removing the punch bowl prematurely come back to bite you?
It’s a difficult juggling act but one thing is certain, there have probably been more mentions of the word ‘inflation’ in the past six months than the previous two decades combined. There’s an entire generation having to come to terms with an economic phenomenon they have never experienced previously. When it comes to the property market and the prospect of rising inflation and its impact on interest rates, increasingly it might be a case of buyer beware.
Markets Review
The NZ sharemarket ended last week barely changed despite the increasing likelihood of interest rate rises in the near term and an extended pause of the travel bubble with Australia impacting visitor numbers.
The NZX50 ended the week barely changed, falling 0.1 percent to close at 12,673, about the same level the market was at five months ago, as it continues to trade in a narrow range.
A2 Milk shares fell 3 percent for the week, their first weekly fall since May, while Ryman Healthcare shares fell 1.6 percent to $13.10 on concerns of higher debt servicing costs as interest rates begin to rise. Shares in internet infrastructure provider Chorus fell as low as $6.12 during the week after Jarden analysts valued the stock at $6.20 on uncertain dividend expectations due to regulation delays. Travel software provider Serko also recovered from a low of $7.14 during the week to finish unchanged at $7.44. Eroad shares spiked higher after announcing a new acquisition (see below).
Across the Tasman the ASX200 gained 0.8 percent to finish at 7,348 due to a continued surge in iron ore prices that saw BHP close at a new all-time high of A$51.87 after jumping almost 15 percent in the last three weeks.
Stocks in the US fell last week for the first time in a month. The benchmark S&P500 index fell 1 percent to 4,327 as optimism over the earnings season and strong results from banking names such as JP Morgan and Morgan Stanley was tempered by growing fears about the rapid spread of the Delta variant globally.
Oil prices suffered their biggest weekly fall since March with expectations of growing supplies coinciding with a rise in coronavirus cases, potentially leading to further lockdown restrictions being imposed and thereby depressing demand. Brent Crude oil futures fell 3.2 percent for the week to US$73.11.
After trading as high at US$1834 during the week, gold pulled back from its 60-day moving average to close at US$1811, up 0.2 percent.
A surprise fall in the 10 year US Treasury yield to 1.29 percent, despite a surge in the consumer price index and the prospect of higher inflation, had market watchers scratching their heads. Inflation is typically bad news for bond prices eroding the value of the fixed payments they attract. The 10-year US Treasury yield is now trading at a five-month low.
Bitcoin continued to lose ground, trading at US$31,700, down almost 6 percent for the week and threatening to fall below a key support level at US$31,000.
The NZ dollar was largely unchanged for the week, despite the Reserve Bank's hawkish outlook and the prospect of interest rates being hiked in the coming months. While the kiwi did spike 1.3 percent following the RBNZ announcement last Wednesday, it closed out the week barely changed at 69.98 US cents.
Business Week in Review
A2 Milk announced the reorganisation of its Asia-Pacific division into three business units and confirmed new executive appointments. The move follows the resignation of Peter Nathan, chief executive for Asia Pacific, in the wake of a series of profit downgrades after the company failed to regain traction from the impact of Covid-19 severely restricting its daigou, or cross-border, trade into China.
Icehouse Ventures says the launch of its latest ‘IVX’ fund is aimed at helping more New Zealand start-ups scale their businesses globally. The $75 million in funding will go to approximately 30 NZ start-ups, with each receiving between $1m to $10m over the next three years to help them accelerate their growth. It is targeted towards more established companies that need funding to push their businesses forward.
Cryptocurrencies are set to come under the spotlight of Parliament’s finance and expenditure committee as it begins an inquiry looking into the nature of the alternative payments system and the associated risks involved. The committee’s terms of reference include inquiring into and establishing the nature and benefits of cryptocurrencies, understanding the environmental impact of ‘mining’ cryptocurrencies and identifying risks to users and traders of cryptocurrencies, in particular the systemic risks cryptocurrencies pose to the monetary system and financial stability, including tax implications.
House price inflation held steady in June at 30 percent, although the Real Estate Institute's house price index rose, as did the number of houses sold. The national index rose to 3,844 points from 3,812 in May. A total of 7,345 homes sold in June - up 4.9 percent from May, seasonally adjusted. The institute said it was the highest number of houses sold in the month of June for five years. REINZ CEO Jen Baird said house price rises continued to defy expectations.
Eroad said it had conditionally agreed to acquire Coretex, an Auckland-based telematics provider. The transport technology company said the deal would be partly funded by an underwritten conditional placement to raise $64.4m and a share purchase plan to raise $16.1m. The acquisition is set to be completed in the second half of the March 2022 financial year and is subject to Commerce Commission clearance, Overseas Investment Office approval, and the approval of Eroad shareholders. Eroad shareholders welcomed the announcement pushing up its share price almost 9 percent on the news. The shares have now gained 33 percent, year to date.
The Financial Markets Authority has fined Equitise $7,500 for failing to file financial statements. The Australian and New Zealand crowdfunding platform which claims to have raised $38 million for young businesses, has not provided its audited financial statements that were due to be filed by October last year, the FMA said in a statement. The company has been issued an infringement notice in addition to a $7,500 fine which it has since paid.
Kiwibank has cut its two-year fixed mortgage rate to 2.49% from 2.55% while the four major banks have raised theirs in the wake of the Reserve Bank’s latest monetary policy review. However, Kiwibank said it is raising its floating, one-year, three-year, four-year and five-year rates. Most rates are increasing by between 0.2 and 0.3 percent.
Michael Hill International said sales momentum continued in its fourth quarter and it now expects to match or better analysts' profit forecasts. Fourth quarter sales rose 116 percent while same-store, or sales in stores open at least 12 months, were up 7.5 percent it said. The company said it lost a total of 10,447 store trading days during the year because of the Covid pandemic and said that disruption has continued into the current year.
Tourism regions are set to get a $10 million funding boost to help improve their facilities in the latest round of the tourism infrastructure fund. Tourism minister Stuart Nash announced 57 tourism projects will receive a total of $18.6m from the funding round, with more than half going to the Kaikōura, Mackenzie, Queenstown Lakes, Fiordland and South Westland districts.
Temporary visa holders will be able to stay in the country for two years instead of one and a streamlined application process will benefit another 57,000 after changes announced by the Government designed to ease growing labour shortages. Immigration minister Kris Faafoi bowed to pressure from a number of sectors, including hospitality and horticulture, by increasing the duration of some essential skills visas and streamlining the application process to provide more certainty to employers and visa holders while Covid border restrictions remain in place.
Coming up this week…
Wed: Blis Technologies AGM; June credit card spending and balances - RBNZ
