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 Big Reveal: Pay Equity in New Zealand
- A new public registry of companies reporting gender and ethnic pay gap information has been launched
- Four NZX-listed companies currently report both gender and ethnic pay gaps in their workforces
- Strong alignment with the UN’s Sustainable Development Goals, although progress in New Zealand has been stagnant over recent years
Harbour Outlook: Ukraine invasion heightens already elevated volatility
- The MSCI All Country World (global shares) Index fell -2.5% in NZD hedged terms in February and, with the New Zealand dollar strengthening in the past month, the same Index fell -5.5% in NZD terms over the month.
- The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month up 0.75%, whilst the Australian equity market (S&P ASX 200) rose 2.1% in both AUD and NZD terms.
- The Reserve Bank of New Zealand (RBNZ) delivered a hawkish statement along with a 25bp hike to 1.00% in February, retaining the option to move in 50bp increments and revising its OCR forecasts higher than implied by market pricing.
- Russia’s invasion of Ukraine has become a humanitarian disaster. The geopolitical environment is now vastly changed with a wide range of potential outcomes. It has also added further upward pressure to global energy prices and inflation.
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
Harbour Outlook: Down by the elevator, up by the stairs?
- The MSCI All Country World (global shares) Index fell -4.9% in USD in January, and with the New Zealand dollar weakening in the past month, the same Index fell -0.9% in NZD terms over the month.
- The New Zealand equity market (S&P/NZX 50 Gross with imputation) finished the month down ‑8.8%, whilst the Australian equity market (S&P ASX 200) fell -6.4% over the month (-5.3% in NZ dollar terms).
- The New Zealand 10-year bond yield rose to 2.60% from 2.39% during January, while the US 10‑year bond yield rose from 1.51% to 1.78%. These moves led to global bond indices declining over the period.
- A sharp lift in interest rate expectations and strong inflation prints contributed to a broad ‘risk off’ move in markets. The pricing of high growth stocks was hit hard, albeit hardly any company was spared by the broad market sell-off.
Social Spotlight III: Modern Slavery
- Modern slavery is a key social issue still occurring today and is a core aspect to be addressed as part of the United Nation’s Sustainable Development Goals
- In our final article following our research project on social aspects, we summarise our findings on modern slavery prevention practices across a sample of the New Zealand market
- We found that the majority of the respondents do not regularly monitor or evaluate their supply chain partners
- Approximately one third of the respondents do not currently have a response mechanism in place in case of a modern slavery incident
- Modern slavery incidents may lead to costs associated with victim support, legal proceedings as well as reputational damage
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
Harbour Outlook: Tricky transition favours stock picking
- The MSCI All Country World (global shares) Index rose 4.0% in USD in December, taking the three-month return to 6.7%. The same Index rose 3.1% in NZD terms over the month, and with the New Zealand dollar weakening in the past quarter, the three-month return in NZD was stronger at 7.5%.
- The New Zealand 10-year bond yield dropped to 2.39% from 2.49% during December, while the US 10‑year bond yield rose from 1.44% to 1.51%. The move in New Zealand yields contributed to positive performance across domestic bond indices, whilst global indices fell.
- Interest rate yield curves flattened over December as central banks globally (the Reserve Bank of Australia being the laggard) acknowledged inflation may be more than transitory and began lifting official rates. At the same time, ongoing shortages and maturing of the economic recovery contributed to the global equity market earnings revision upgrade ratio slowing, to be only slightly positive. This lift in rates and slowing earnings revisions is likely to contribute to a lift in equity market volatility.
Top 10 risks (and opportunities) for 2022
Looking back on 2021 it is interesting to ponder how it will go down in history. Could it be seen as the year that inflation had a momentary resurgence before fading back into the background, or the year that entered us into a new normal? Could it be seen as the year that the 2021 United Nations Climate Change conference (COP26) brought about meaningful climate change mitigation? Could it be seen as the year that sent Chinese stocks into a bear market or the year that provided the buying opportunity of a generation?
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Harbour Outlook: Push and pull factors dictate equity returns
- The MSCI All Country World (global shares) Index fell -2.5% in USD in November, taking the 3-month return to -2.0%. Returns in NZD were positive due to a weakening domestic currency, delivering 2.9% in November whilst the 3-month return was 2.0%.
- Global equity markets fell materially on the combination of Omicron COVID variant headlines, the challenges of northern hemisphere lockdowns and the likely upward trajectory of interest rates following strong inflation data.
- While the Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) by 0.25%, their accompanying commentary was more balanced, reducing the risk of aggressive monetary policy tightening.
- Globally bond yields fell on news of the Omicron variant; the New Zealand 10-year bond yield drew back to 2.48% from 2.63%, while the US 10-year bond yield fell from 1.55% to 1.44%. This contributed to positive performance across bond indices.