INSIGHTS

MARKET SUMMARY: 12 JUNE TO 16 JUNE

Research Team, 16 June 2017

After a tumultuous week last week, that saw a surprise result in the UK election, markets were looking forward to a less dramatic week. However, there were plenty of data points to digest including the all important US Federal Reserve June meeting, New Zealand’s first quarter GDP as well as the continued focus on the UK, to name just a few.

The UK election surprised markets and left them reeling after it resulted in a hung parliament. Prime Minister Theresa May called the snap election when the Conservative Party had a considerable lead in the polls. However, several weeks down the track, this lead narrowed considerably and after the British people had been to the polls, it emerged that the conservatives had lost the eight seat advantage they had going into the election. May has now been scrambling to strike a deal with the Democratic Unionist Party, and needs to confirm something prior to June 19 when Brexit negotiations with the European Union begin. The British pound has fluctuated since the election, as has the FTSE 100, with further uncertainty gripping the region.

The US Federal Reserve’s June meeting resulted in yet another 25 basis point increase in the Fed Funds rate. The hike was widely expected with the market pricing in almost a 100% chance of a rate hike. The interesting part was the commentary. There were two main focuses for the market; firstly was the Fed still anticipating another rate hike this year following some softer economic data and the increased uncertainty that has been seen in recent weeks? In a confident move the Fed still anticipates a further rate hike this year, sticking with plan. The most likely meeting for this to happen is the September meeting, however, even following this decision and the signalling from the Fed the market at this stage only sees a 22% chance that this will come to fruition.

Secondly, analysts were looking for details on the reduction of the immense US$4.2 trillion balance sheet created through the unprecedented quantitative easing programme following the Global Financial Crisis. Little information was given although Chair Janet Yellen confirmed that it would begin “relatively soon” and that is would be a gradual reduction.

Locally, the REINZ house price index data was the first market grabbing news this week, with the national median house price rising 6.7% for the year ended in May. The House price index showed that housing market activity has lifted 5.0% for the year however for the month has fallen 0.4%. Sales volumes decreased significantly particularly in the Auckland region which also saw a slow down in median price gains. Housing activity remains strong in the regions with four of the fourteen regions measured setting record median prices, which were Northland, Manawatu/Wanganui, Nelson/Marlborough and Southland.

First quarter GDP in New Zealand missed expectations, growing only 0.5% for the quarter and 2.5% for the year. Expectations were for quarterly growth of 0.7% and annual growth of 2.7%. Agriculture showed a massive improvement for the quarter, up 4.3% driven by higher milk production. This was the highest quarterly growth for the sector since September 2014. Construction was down 2.1% for the quarter in its first fall since June 2015.

In Australia, Labour force data showed a continuing trend of increasing full time employment, while part time employment also saw a jump. The unemployment rate fell to 5.5%, ahead of expectations for it to remain at 5.7% while the labour force increased slightly to 64.9%.

This is in contrast to the Westpac consumer sentiment survey. This is the third month in a row of falling consumer confidence and remains a contrasting figure to the upbeat business confidence survey. Economic conditions, the government’s budget, taxes and interest rates were the top news topics recalled by consumers, and developments in all were judged as “unfavourable”. The index came in at 96.2. A reading below 100 indicates that pessimists outweigh optimists.