Research Team, 8 November 2018

There was an abundance of economic releases this week, but dominating global headlines was without doubt the US midterm elections. Back home, we saw the unemployment rate unexpectedly fall to a decade low, a decision from the RBNZ to hold the OCR steady, and prices at the Global Dairy Trade auction continue to slide. It was also a busy week of results, with almost 100 of S&P 500 companies reporting earnings. In New Zealand, we saw results from TrustPower, Goodman Property Trust and Pushpay, and annual meetings from NZ King Salmon, Fonterra and Trade Me.

This week saw unemployment drop to a surprise 10-year low, sparking a rally in the NZ dollar. The unemployment rate dropped to 3.9% in the September quarter, well below 4.4% recorded last quarter and the lowest since the June 2008 quarter, when it was 3.8%. The rate was well below market estimates for a slight increase to 4.5%. The NZ dollar rallied more than 1.1% against the US dollar to a three month high of US$0.67 following the news. Meanwhile, annual wage growth remained a relatively modest 1.9%.

The next day, the Reserve Bank of New Zealand kept the Official Cash Rate steady at a record low of 1.75%. It has now been two years since the last move. The bank said it expects the rate to stay unchanged until 2020 and removed commentary of a rate cut. Governor Adrian Orr commented “employment is around its maximum sustainable level, however core consumer price inflation remains below our 2% target mid-point, necessitating continued supportive monetary policy.”

Dairy product prices continued to slide at the latest Global Dairy Trade auction this week. The headline index fell 2% from the previous auction three weeks ago. Whole milk powder dropped 2.9% to its lowest price since August 2016, as supply continues to outweigh demand. Cheddar saw the most dramatic move, falling 4.6%, while butter slipped 1.7%.

In the US, markets soared following the midterm election results, lifting a cloud of uncertainty that was weighing on the market. Democrats won back the House of Representatives while Republicans retained control of the Senate, an outcome that has split Congress. Following the result, President Donald Trump indicated he is willing to work with the Democrats on policy initiatives to ensure the economy continues to grow. The major indices hit session highs following his comments. The Dow Jones and S&P 500 posted gains of more than 2.1%, marking the best rally after midterm elections since 1982.

Historically, markets have performed well when Congress is split and the White House in under Republican control, with the S&P 500 performing well in the wake of the elections. However, a split Congress could also lead to more investigations into President Trump and therefore create more market volatility. Trade will also remain one area of policy where Trump still has a high level of freedom.

Another notable announcement out of the US this week, was the number of US job vacancies. The data showed Americans remain confident in leaving their jobs for better pay or benefits elsewhere. Job vacancies exceeded the number of unemployment by more than one million, indicating the increasing difficulty for employers to fill open positions.

Across the ditch, the Reserve Bank of Australia announced its decision to keep the cash rate unchanged at a record low of 1.5%. Governor Philip Lowe said GDP is now expected to grow by 3.5% in 2018 and 2019, up from 3%. The Australian dollar held firm following the announcement.

Markets in Europe were mixed this week with politics remaining in focus. Euro zone finance ministers continue to put pressure on Italy to submit a new budget to the European Commission to end the standoff over the country’s spending plans.

Meanwhile, former UK Prime Minister, Tony Blair, said he will do ‘everything he can’ to stop Brexit. Blair claims Brexit is painful and pointless. Britain is due to leave the European Union in March 2019.