Research Team, 7 July 2017

The opening week for the second half of the year has been mixed, with geopolitical tensions rising, a holiday shortened week in the US and a number of important economic data releases from all regions of the globe.

Markets have been a little on edge this week as rising political tensions saw risk aversion creep back into markets. The first event which saw tensions rise was the successful launch of an intercontinental ballistic missile from North Korea. The missile was launched on Monday and it landed in the Japanese economic exclusion zone. The missile reportedly is capable of reaching the US and as such, the US has taken this latest launch as a clear and sharp military escalation and that US military action remains on the table.

The missile launch comes ahead of the G20 summit which, at the time of writing had not started. It is being held in Hamburg Germany and has already had plenty of media attention with reports of growing tension between German Chancellor Angela Merkel and US President Donald Trump. There is expected to be a clash over climate change and trade issues. In addition to this, it will be the first time President Trump and Russian President Vladimir Putin will meet for the first time.

Locally, the Global Dairy Trade auction for the week resulted in another marginal decline in the dairy price index, slipping 0.4%. The last auction saw a decline of 0.9%, ending a six auction winning streak. Volumes were significantly higher at the auction, up 7,000 tonnes from the previous auction. Whole milk powder prices saw a 2.6% increase, rebounding after two consecutive auctions of losses. The small decrease is not anticipated to have an impact on the forecast payout for dairy farmers.

The most important economic announcement of the week for New Zealand was the Quarterly Survey of Business Opinion. Confidence remained steady for the June quarter with a net 18% of businesses expecting better economic conditions over the coming months. Positive sentiment widened geographically, with Waikato, Bay of Plenty, Gisborne, and Southland seeing the highest levels of business confidence. Of note in the survey, confidence in the building and construction sector fell sharply in the June quarter, while capacity utilisation slipped a little as well. This is in line with softening activity within the sector and was in line with other economic surveys. Despite this area of weakness, the economic environment in New Zealand remains positive and is indicative of continued growth for the remainder of the year.

QV released data on the housing market in New Zealand, which showed further evidence of a slowdown. House sales for the second quarter of the year were down 30% from the previous year in Auckland and there was less of a rise in prices in the region as well, up only 7.2% for the year. Wellington saw the biggest increase in prices, up 18% from the prior comparable period. Tauranga was close behind, with prices rising 14.6% for the year. The nationwide average rose 8.1% for the year to $639,051, however the inflation adjusted rise was just 5.9%.

Across the ditch, the biggest event of the week was the July meeting of the Reserve Bank of Australia. In the lead up the market was hoping that the RBA would adopt a similar stance to other central banks across the world, taking a more hawkish view, discussing the possibility of a rate hike. However this was not the case with the central bank sticking to its knitting, holding rates steady and keeping rhetoric in line with previous commentary.

The release of the US Federal Reserve minutes gave the market something to talk about as it showed some division within the voting members of the committee. Commentary following the latest rate hike indicated that the Fed was still on track to raise rates at least one more time this year, however there has been growing cynicism on whether this will happen or not. The minutes showed that there is increasing tensions among members over the outlook for inflation and how this will impact the path of interest rates. The most likely time for the years third rate hike is the September meeting, so data will be watched closely between now and then.