Research, 8 September 2017

Markets have been rocked this week by increasing geopolitical tensions, as North Korea conducted a sixth successful test of nuclear weaponry. The unpredictable nation has been the cause of plenty of volatility of late with a war of words erupting between North Korean Leader Kim Jong-un and US President Donald Trump, followed by further missile tests. The UN have had several emergency meetings to talk about putting sanctions in place, with the US seeking an asset freeze, as well as an oil embargo.

Late last week, the non-farm payrolls data from the US missed expectations, with just 156,000 jobs added in August. This was 24,000 short of expectations and 20,000 less than the long run average. The unemployment rate crept higher to 4.4% from 4.3% and wage growth also disappointed. This data miss has seen the market become even more cynical of a further rate rise from the US Federal Reserve this year. The market is now pricing in only a 28% chance of another rate hike by the end of the year. The September meeting is on the 20th and the market will be looking for some sort of indication of when to expect the Fed balance sheet reduction to begin.

Locally, the NZ election is front of mind for investors with just two weeks left until we go to voting booths. Neither Labour nor National are standing out as clear winners and it is looking more and more likely that Winston Peters and NZ First will be the King maker. The latest polls have also shown that Labour’s Jacindamania gains in the polls have come largely at the expense of the smaller parties, rather than National party voters.

The leaders’ debate on Monday night was certainly a lot more heated than the first, with plenty of robust discussion around policy for viewers. At the time of writing, there was another leaders’ debate to be held, another Colmar Brunton Poll and another multi party debate that Gareth Morgan and The Opportunities Party are trying to gain a place in, while Winston Peters is opting out, believing he should be invited to the main leaders debate.

Whatever the outcome of the election on the 23rd of September, it is unlikely to cause a major disruption to the market and the economy. New Zealand is in a strong economic position. Growth is robust, unemployment is low, the dairy sector has improved substantially, and most parts of the economy are doing very well. Despite the likelihood of short-term volatility, financial markets will ultimately put more weight on fundamentals, rather than political change in Wellington.

The latest global dairy trade auction this week saw a 0.3% increase in the average price of dairy, the seventh consecutive auction that has seen a less than 2% change in price. The market has cheered the price stability over the last few months, with the last period of stability occurring in the record breaking payout 2013/14 season. Whole milk powder and skim milk powder both saw price weakness at the auction, falling 1.6% and 1.2%.

Australia had a number of key events this week, including the Reserve Bank of Australia’s September meeting and the second quarter GDP announcement. The RBA remained on hold again, however, the accompanying rhetoric was very upbeat with recent data points indicative of growth. The central bank acknowledged that the current loose monetary policy stance is supportive of the current growth environment and is likely to remain this way as the economy continues to normalise.

Second quarter GDP just missed expectations in Australia, although it still showed solid growth of 0.8% for the quarter and 1.8% on an annualised basis. This was a jump from the 0.3% quarterly growth in the March quarter. The solid second quarter GDP outcome was supported by strength in exports and public spending, led by infrastructure construction.

Next week, we will be watching labour force data from Australia, Consumer Confidence in New Zealand, inflation data from both the UK and the US and the Bank of England meeting. In addition to this, the North Korean situation will remain front of mind as will the NZ Election and the developing story of Hurricane Irma as it hits the US.