THE WEEK AHEAD: WILL THE OCR CHANGE?
Mark Lister, 22 February 2021
Markets were relatively subdued last week, seemingly taking a breather after some strong gains earlier in February. The S&P 500 in the US slipped 0.7%, while Europe and the UK were up 0.4% and 0.5% respectively. The ASX 200 in Australia was flat, while the NZX 50 fell 0.3%. The local market is having a difficult month, in contrast to offshore peers.
The NZX 50 is currently down 4.1% in February, which sees it on track for the fourth worst monthly performance in the past ten years. A key event this week for global investors will be the appearance of Federal Reserve Chair Jerome Powell before Congress. Powell will deliver his semi-annual testimony on the economy before the Senate Banking Committee on Tuesday, and then the House Financial Services Committee Wednesday.
He will be expected to address the recent increases in interest rates, as well as the debate over of rising inflationary pressures. The 10-year Treasury yield in the US rose to 1.34% last week, the highest level since March 2020 and well above the 2020 low of 0.32%. Meanwhile, the 10-year breakeven inflation rate increased to 2.24%, the highest since August 2014. This represents the average level of inflation that financial markets see over the next decade, as implied by the relative pricing of regular US Treasury bonds and inflation-indexed bonds.
Powell will no doubt want to remind policymakers the economy is fragile, and that the Fed intends to keep monetary policy supportive for an extended period. However, he will need to acknowledge stronger economic indicators (including last week’s very strong January retail sales report) and an improving virus situation.
US Treasury Secretary Janet Yellen is also speaking on Monday, about rebooting the economy and regulating financial markets, while the US$1.9 trillion relief package could appear before the House of Representatives this week.
It will be a busy week on the domestic front too, with a plethora of local corporates set to announce results, some of the highlights are likely to include Freightways, Mercury NZ, Summerset, Meridian Energy, Spark, a2 Milk, Port of Tauranga and Tourism Holdings. Across the Tasman, Lendlease, APA Group, and Woolworths are likely to be some of the highlights.
Outside of the reporting season, the key event on the local calendar will undoubtedly be the Monetary Policy Statement (MPS) from the Reserve Bank of New Zealand (RBNZ). This will be released at 2:00pm on Wednesday afternoon, and while any change in the Official Cash Rate (OCR) is extremely unlikely, there will be significant interest in the updated financial and economic projections. The string of improving economic indicators we’ve seen since the last MPS in November should ensure growth and inflation forecasts are upgraded. Markets will also be very interested in how the RBNZ forecasts for an (unconstrainted) OCR have changed, and whether any potential tapering of the asset purchase programme can be expected.
The other major local releases this week will be retail sales for the December quarter and the final ANZ Business Outlook for February. The retail sales report is out at 10:45am on Wednesday, and it will follow a very strong rebound in the September quarter, after the June quarter was hit hard by the 2020 lockdown. The ANZ Business Outlook will be released at 1:00pm on Thursday, and while the preliminary release for this month was strong, this final one might've been partially impacted by the brief lockdown that Auckland suffered last week (depending on when the balance of the responses were collated).