Research Team, 2 February 2017

January has been a positive month for most markets with the NZX50 rising 2.46% and putting a stop to a four month losing streak. The year started strongly with equities benefitting from the stimulus that the Donald Trump Presidency would bring. The S&P500 in the US rose 1.79% for the month while the Dow Jones hit a key milestone of 20,000 during the month. Although the Dow finished below this level, the index still saw a 0.51% increase for the month.

However towards the end of the month, uncertainty returned to markets and we have seen some weakness in markets as investors were reminded of the uncertainties that the Trump administration could bring. This was made particularly clear when President Trump signed an executive order that severely restricts immigration from seven Muslim countries. Investors retreated to safe havens as volatility returned to markets and there were declines across the board. This saw the Australian, UK and European markets finish almost flat, paring back earlier gains from the month.

This week has been a busy one on the local economic calendar, starting with migration at the beginning of the week. Annual net migration hit yet another record in December, with 70,600 more migrants arriving in NZ than leaving during 2016. The greatest contribution came from migrants with working visas, while there was also a large increase in New Zealand and Australian citizens. In addition to this, annual visitor numbers for the year hit a record 3.5 million, a 12% increase on 2015.

New Zealand’s labour force data showed an increase to the headline unemployment rate, rising to 5.2% in the December quarter from 4.9% in the third quarter. Despite the rise in the headline percentage, the underlying data showed a positive trend in employment and the increase was driven by the increase to the participation rate. The participation rate hit a record high 70.5% in the quarter and the number of people employed increased by 19,000. Full time employment rose in the December quarter, with an extra 32,000 gaining full time employment, an increase of 1.6%. Part time employment decreased for the quarter falling 2.2% or 12,000 people.  The increase in the participation rate is a positive sign for the economy and implies that people are more confident to enter the workforce.

Prime Minister Bill English announced this week that the 2017 election will be held on September 23. The last day for the current parliament will be August 17. This is the second time Bill English has been the leader of the National Party for an election however last time he was the leader of the opposition rather than the incumbent. English took over from John Key on 12 December last year. Despite an election being called, New Zealand’s political environment remains relatively stable, although we would expect some nervousness to creep into markets as it will inevitably closer than previous elections.

The Bank of Japan met this week and held its current stimulus package steady. On a positive note, the central bank was far more upbeat about the Japanese economy, and upgraded GDP growth to 1.5% for 2017 up from its previous estimate of 1.3%.

The Federal Reserve met for the first time this year and as was expected chose to keep its benchmark interest rate in a range of 0.5% to 0.75%. The central bank was upbeat about the US economy with jobs market and economic activity strengthening. The US non-farm payroll will be released overnight Friday (Saturday morning NZ time) and this is always watched closely by the Fed to gauge how strong the employment market is.

The Reserve Bank of New Zealand is due to meet next week and we are expecting them to keep rates on hold. The market will be interested in the commentary, after a better than expected CPI reading saw some economists change their forecasts to predict a rate hike later this year.