Harbour Navigator: Understanding the RBNZ’s recent hawkish shift
The Reserve Bank of New Zealand (RBNZ) surprised many at its November Monetary Policy Statement (MPS) with a more hawkish view of recent economic developments. While we don’t necessarily view the skew in economic risks the same way, we recognise the high degree of uncertainty in the economic outlook and the importance of understanding the central bank’s point of view.
At the heart of the RBNZ’s hawkish shift are two factors: h...
Harbour Outlook: Economic Crosscurrents
- The MSCI All Country World Index (ACWI) continued its decline, posting a -2.7% loss in New Zealand dollar-hedged terms (and a 0.2% gain in unhedged NZD terms). Despite three consecutive months of negative returns, the 12-month return figure for the index stands at 9.5% in NZD-hedged terms and 10.4% in unhedged terms.
- Returns for the month were similarly weak in local markets, with the S&P/NZX 50 Gross Index (with imputation credits) falling -4.8%, and the S&P/ASX 200 Index falling -3.8% (-2.4% in New Zealand dollar terms).
- Bond indices were also negative over the month. The Bloomberg NZ Bond Composite 0+ Yr Index fell -0.2%, whilst the Bloomberg Global Aggregate Bond Index (hedged to NZD) also dropped -0.7% over the month. This came as the US market saw 10-year government yields increase to 4.9%, a level not seen since 2007, with resilience in US economic data prompting the market to largely unwind an expectation that the Federal Reserve would be cutting rates in 2024.
Harbour Outlook: Higher for longer, but how much longer?
The MSCI All Country World Index (ACWI) declined for the second month in a row, posting a -5.0% return in unhedged New Zealand dollar terms (-3.4% in hedged terms after strengthening in the New Zealand dollar). Returns were similarly weak in local markets, with the S&P/NZX 50 Gross Index (with imputation credits) falling -1.9%, and the S&P/ASX 200 Index falling -2.8% (-4.1% in New Zealand dollar terms).
Globally, weakness was...
Harbour Navigator: New Zealand’s weakening export outlook to provide multiple challenges
Slowing global demand, led by a stalling Chinese economy, has seen New Zealand’s commodity export prices fall sharply in recent months.
Weaker export revenues will likely weigh on economic activity, supporting our view that further Reserve Bank of New Zealand (RBNZ) rate hikes are not necessary and causing a further deterioration in the fiscal accounts that may require additional bond issuance.
Export weakness is also likely...
Harbour Navigator: Is inflation sticky?
After an aggressive RBNZ tightening cycle, the New Zealand economy is likely to enter recession later this year.
Inflation, however, is unlikely to quickly return to the RBNZ’s 1-3% target range and involves three broad steps – supply chain normalisation, lower housing costs and a drop in wage growth. Only the first step is complete.
We expect the RBNZ to increasingly recognise the impact of its rapid rate hikes to highly...
Harbour Navigator: New Zealand's external reliance is in the spotlight
New Zealand is a small, open economy with a heavy reliance on the rest of the world for export revenue and funding.
The funding reliance is particularly acute currently as our tourism sector isn’t generating its normal amount of foreign revenue, pushing our current account balance to its largest deficit on record, almost 9% of GDP.
While our current account balance should improve as tourists continue to return to New Zea...
Harbour Navigator: RBNZ not done yet but getting close
The RBNZ lifted the OCR by 50bps at the February MPS and continues to anticipate further tightening from the current 4.75% to 5.5% as inflation remains too high and labour markets are too tight for comfort.
The North Island floods are likely to add to inflation and activity in the medium term. Beyond the floods, the tension between strong historical data and weak forward indicators continues in New Zealand – we believe the...
Controlling inflation is a key pillar to calm markets
Central banks are focussed on bringing down inflation
The Reserve Bank of New Zealand amongst the earliest to hike rates and now others are moving rapidly
Sharp interest rate rises are now largely baked into financial markets
Lowering inflation is the best outcome for businesses and ultimately households
We think expectations of a cash rate of 4.6% by May 2023, is excessive although markets will continue to monitor inflation ...
The end of the “Great Moderation”?
Most economists expect historically high inflation to moderate over the next year, but the near-term outlook is uncertain.
Over the long term, changing structural inflation forces may create even greater uncertainty for investors.
The possible end of the great moderation – the period of relatively benign economic cycles - that has prevailed for most of the past 40 years - may see fixed income investors seek greater compensat...
Central banks forced to prioritise inflation over growth
Inflation has risen sharply over the past year. What was initially expected to be transitory has become more widespread and persistent, with signs that price rises are being seen as the new norm.
The Russian invasion of Ukraine is adding to already-high global inflation, while also reducing growth prospects.
With inflation dangerously high, central banks (including the Reserve Bank of New Zealand (RBNZ)) are backed into a corn...