Harbour Navigator: Fortress Australia
The banking system in Australia has multiple points of difference compared to the US, all pointing to a greater capacity to weather financial and economic stress. What we heard in our visit to Australia this week was exceptionalism and resilience in the banking system.
“A show of force” is how the Australian Financial Review subsequently described their Summit. In previous years you might have heard the regulators bemoan the ...
Harbour Outlook: Inflation not giving up without a fight
Key points
The MSCI All Country World Index returned 1.3% in New Zealand dollar terms, and -1.9% in New Zealand dollar-hedged terms. At the sub-sector level, we saw a continuation of last month’s thematic with defensive sectors (utilities, materials) lagging as investors rotated into the more interest rate-sensitive sectors such as information technology and financials.
The New Zealand equity market (S&P/NZX 50 Gross with i...
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...
Harbour Outlook: Cycling at warp speed … recession priced in?
Key points
The MSCI All Country World (global shares) Index fell -0.2% over the month in both NZD-hedged and -unhedged terms.
The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month down -4.8%, whilst the Australian equity market (S&P ASX 200) fell -2.6% in AUD terms (-1.9% in NZD terms).
Bond yields tracked downwards through May with a partial re-tracing through the last week of the month. As a res...
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...
The bond market is not signalling a recession
- Markets have aggressively baked in a sequence of interest rate rises as central banks shift to tackling inflation
- These rate rises are now front-loaded and may come quicker than expected
- This may pose risks for economic activity and continued market volatility. However, markets are not signalling a recession is likely
- After an initial flurry of rate rises, we expect a pause and more patience to judge the impact on activity and inflation
Uncertainty around hawkish central banks has led to volatility
- Global equity markets were strong in 2021 benefiting from accommodative central banks and record earnings growth to spur on returns
- Loose monetary and fiscal policy, implemented in response to the COVID-19 pandemic, has led to an increase in inflation, which central banks now need to combat
- Uncertainty around the exact extent of future interest rate changes has led to a volatile start to 2022 in markets
Still a large gap in New Zealand output
- The New Zealand economy shrank at the end of last year as the construction sector struggled to find the resources to continue to expand, while retail trade and accommodation activity dropped due to a lack of tourists.
- New Zealand is in a better position than many other economies, but there is still a gap between our potential output and where we are currently tracking, which is acting as a disinflationary force.
- It seems unlikely that the RBNZ will hike rate hikes in the next year; they have many other actions they could take before contemplating interest rate hikes.
- Longer-dated bond yields could be led higher by offshore developments as global growth beats expectations.
