Research Team, 10 March 2017

A certain amount of caution crept into markets this week in anticipation of the Federal Reserve’s March meeting, bringing them back from recent highs. Global markets have had a strong run over the past month or so with shares in the US in particular positing some impressive gains. Since the election in November, the S&P500 has gained more than 10%, as optimism around tax cuts and deregulation spurs markets higher.

In New Zealand, with reporting season now over and done with, investors are turning to global sentiment and economic data and there has been a few interesting reports released this week. Building consents for January rose 0.8% from December, ending the two month streak of declines.  Consents for apartments and town houses were the driving force behind the gain, with the number of permits for new houses falling. Consents rose 3.4% from the previous year, while the value of consents slipped 3.5% to $619 million, the lowest level since January 2015.

The latest Global Dairy Trade auction this week saw a sharp decline in the index, falling 6.3%, the second auction in a row of declines. The larger than anticipated volumes saw a bigger than expected decline in prices, particularly in the key product groups for New Zealand farmers. Whole milk powder, our largest product group, fell 12.4%, while skim milk powder fell 15.5%.  Although at this point most economists are not anticipating a cut to the forecast farmgate milk price from Fonterra, currently $6.00, most are no longer expecting the price to rise from here.

The Reserve Bank of Australia was the first cab off the rank in terms of the March central bank meetings, and as expected kept to the status quo. This is the sixth month that the cash rate has stayed at the historic low of 1.50%. The commentary was upbeat about the state of the Australian economy with non-mining investment spending continuing to increase. The labour market is showing positive signs however the housing market in Australia remains mixed with some cities, namely Melbourne and Sydney experiencing significant increases, while other areas are now seeing price declines. Inflation is expected to pick up over the course of the year to be above the targeted 2%, while underlying inflation is expected to be more gradual.

At the time of writing the European Central Bank was yet to have its March meeting, to be held later this week. Expectations are for the ECB to stand pat and not make any changes to the current monetary policy. However, the commentary again will be closely watched for signs of when tapering of the massive quantitative easing programme will begin. Inflation is back at the targeted level of around 2% for the first time since 2013, gross domestic product in the region is growing at a steady rate and economic data is positive with the purchasing managers’ index at a 70 month high.

Over the coming weeks, markets are likely to focus on further important pieces of data, the Federal Reserve meeting, and anything more we see on the policy front out of the US. At present, there is a lot of optimism around tax cuts and deregulation. However, this must be balanced against how easily President Trump can implement these changes, as well as potential trade policies that are negative for growth. At the time of writing, the market was pricing in a 100% chance that the March meeting for the Federal Reserve would result in a rate hike. It hit 100% following the ADP survey of private sector employment beating expectations by adding 298,000 jobs. This comes ahead of the all-important non-farm payroll report due out Saturday morning NZ time.

Beyond that, the French elections are looming as the next major political event to watch. The first round takes place in late April, with a second round likely to take place in early May. Markets will follow this closely, with France the second biggest economy in the Eurozone.