Mark Lister, 15 November 2017

The election win by Donald Trump sent financial markets into a spin last week. Economists and forecasters alike have all been scrambling to figure out what it means for the economy, the political landscape and investment markets.

The sharemarket volatility has garnered most of the attention, but the moves in bond markets could ultimately have the biggest impact on the majority of New Zealanders.

After an initial panic last Wednesday, investors have quickly refocused on what some of Trump’s key policies could mean.

Many of these, including tax cuts and infrastructure spending, could lead to a solid uplift in US economic growth. That would push inflation higher, especially as the US economy gets closer to full employment.

Throw in a bit of protectionism and you have further inflationary pressures. Staff in the US are a lot more expensive than in China or Mexico, so it will cost companies more to produce things and these increases will be passed on to consumers.

Higher inflation means higher interest rates, which is why we have seen a massive increase in the latter over recent days. The US 10-year bond yield has soared to the highest since January, and interest rate markets here have followed.

Some of the recent moves are likely to be an overreaction, and could reverse. However, if Trump really gets moving on his fiscal spending plans, we will almost certainly see interest rates move higher, and this could have implications for many New Zealanders.

Mortgage rates are not just about the OCR, which remains at a record low. Banks get their funding from other places, both domestically and offshore. With those funding costs going up, mortgage rates will have to follow.

A lot of people have paid some fairly big prices for houses in recent years and worked out their repayment schedules based on the lowest borrowing costs we’ve seen in decades. Hopefully they have left a buffer in their household budgets to allow for a 1 to 2 per cent rise in mortgage rates, in case that occurs.

Savers will be crossing their fingers. Term deposit rates fell to the lowest levels since the 1960s a few months back, so they will be hoping the recent upward pressure continues.

Moves in interest rates are affecting other assets too. In the US, financials and companies that will benefit from a rebound in inflation have risen strongly since Trump won. On the other hand, utilities and real estate have fallen.

Those moves have been mirrored here. Companies leveraged to growth are up, like Fletcher Building, Mainfreight and Fisher & Paykel Healthcare. Those offering great yields but with limited growth are down, like property and utilities companies. There are always winners and losers, it’s just that our overall market has plenty of the higher yield companies, but not as many growth exposures.

A bright side for us could be a stronger US dollar. Potential trade issues aside, that would take pressure off the Reserve Bank, improve the outlook for the dairy payout, and provide a healthy tailwind for investors and KiwiSaver funds who own US assets.

This article was published in The New Zealand Herald on 15th November 2016.