INSIGHTS

MARKET SUMMARY: 24 TO 28 SEPTEMBER

Research Team, 28 September 2018

It was a big week for central banks this week after the Federal Reserve (Fed) increased rates and maintained its plans to steadily tighten monetary policy. Following the Fed, the Reserve Bank of New Zealand (RBNZ) kept the Official Cash Rate (OCR) unchanged at 1.75%, as expected, saying the outlook for the economy was little changed. In addition, we saw business confidence rebound this month after reaching a decade low in August

The Fed upped its outlook for US economic growth this year and next. It now expects the US economy to grow by 3.1% in 2018, up from 2.8%. They also see the economy expanding 2.5% in 2019, up from a prior estimate of 2.4%. The bank increased the fed funds rate 25 basis points to a range of 2% to 2.25%, up from 1.75% to 2%. This marks the central bank's eighth rate hike since 2015. The Fed is projecting one more hike in December, and then three more in 2019. The central bank also removed the word “accommodative" from its statement in regards to its monetary policy.

US indices hit their session highs after the Fed's announcement but later pulled back as Fed Chair Jerome Powell answered questions. Powell said he does not see inflation surprising to the upside, noting “it's not in our forecasts." The comment sent rates lower, along with bank stocks. The 10-year Treasury note yield fell to 3.06%, after rising above 3.11% earlier in the week. Powell also commented that the central bank is hearing a "rising chorus of concerns" from companies about tariffs.

The price of Brent Crude rose above US$82 per barrel this week, its highest in since November 2014, amid concerns around supply. The United States will apply sanctions to halt oil exports from Iran, the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), starting on November 4. The Trump Administration have tried to assure the market that enough supply will remain, while requesting producers to raise their output.

Back home, business confidence bounced this month with companies more upbeat about the economy and how they expect to perform in the year ahead. According to the latest ANZ business confidence survey, a net 38.3% of 390 companies surveyed expect general business conditions to deteriorate in the year ahead. That was a sharp rebound from the net 50% expecting weaker conditions in August. However, investment intentions continued to fall, with a net 9% expecting to decrease investment in the coming year. The New Zealand dollar rose slightly on the news.

The local sharemarket was more subdued this week, after reaching an all-time high last Friday. Within the index, Auckland Airport closed at a two-year high, while Metlifecare, Mainfreight and Precinct Property all closed at records. Friday marked the last day of the third quarter, and at the time of writing, the index was up 4.6% for the quarter, following a 7.5% gain in the second quarter.

In company news, a2 Milk’s share price came under pressure this week on news that CEO and Managing Director, Jane Hrdlicka, sold $4.4m worth of her stock in the company. The divested shares were given to Hrdlicka as part of her remuneration package when she joined the company just two months ago. It was reported the sale of her shares were to meet tax obligations and fund commitments made before she joined the company. A2 Milk shares remain up 44% this year.

In economic news, New Zealand posted its largest monthly trade deficit on record in August. The trade deficit stood at $1.484bn in August, missing forecasts for a shortfall of $925m following the revised deficit of $196m in July.