INSIGHTS BLOG

WEEK IN REVIEW: 4 TO 8 FEBRUARY

Research Team, 8 February 2019

Last week the global reporting season remained a key focus for investors.

The annual State of the Union Address from President Trump also grabbed headlines. Central bank meetings were held in Australia and the UK, while the December labour force report was the key release domestically. Local investors kept an eye on reporting season in Australasia, and this week will be watching results from Contact Energy, SkyCity, Skellerup Holdings and NZX Ltd.

The New Zealand dollar slid after local data showed unemployment, job gains and wages growth all missed forecasts.

The unemployment rate rose to a higher than expected 4.3% in the fourth quarter, after touching an unexpected decade low of 3.9% in the prior quarter. The news sent the New Zealand dollar lower to $0.678 from $0.683 immediately. Bonds rallied hard, with two-year yields dropping 7 basis points to 1.67%, well below the 1.75% cash rate. The Reserve Bank of New Zealand is set to hold its first policy meeting of the year this week and markets are envisaging it will take an easing bias.

In Australia, Reserve Bank Governor Philip Lowe said it was possible Australia's cash rate might be cut further.

Lowe indicated a rate cut was just as likely as a rate hike, given the slowdown in the global economy, weakening domestic demand, and issues in consumer credit and the property market. The Australian dollar dived 1.8% against the US dollar following the news.

The third Global Dairy Trade event of the year saw prices rise for the fifth consecutive session.

The headline index rallied 6.7% thanks to an 8.4% jump in the price of whole milk powder. The price of rennet casein surged 10.9%, anhydrous milk fat climbed 5.8% and butter gained 4.2%. Bucking the trend was butter milk powder which fell by 3.1%.

Australia’s Royal Commission final report released on Monday, was not as bad as many had feared.

The major Australian banks and wealth managers rallied as investors breathed a sigh of relief. Overall, while scathing of the industry, the report was less aggressive than many in the market had feared with Commissioner Hayne not making any recommendations that will fundamentally change the business model for either the banks or large wealth management companies like AMP. Commissioner Hayne believes the laws are there and largely fit for purpose, but need to be properly enforced by regulators, while culture needs to improve. The Commission has made 76 recommendations, and the Australian Government has announced it will legislate for 75 – the exception being the recommendation to change mortgage broker compensation, from lender pays to borrower pays. This recommendation will be reviewed in three years.

Gone is the rhetoric from the Federal Reserve that “the next move in interest rates is likely to be higher.”

In the US, the Federal Reserve signalled that rate increases are on pause and that its next policy move will depend on economic data. Former Federal Reserve Chair Janet Yellen said the central bank may have to cut interest rates if negative global growth starts to impact the US. Otherwise, the US looks solid amid a thriving labour market, strong consumer and contained inflation.

Over to Europe, data on Wednesday showed German factory orders unexpectedly fell in December.

The latest sign that Europe's largest economy is struggling for momentum. Germany is being negatively impacted by a global slowdown and rising trade barriers. Trade worries have been an overhang for global markets for nearly a year as China and the US slap tariffs on billions of dollars worth of goods. The two countries have set a March 2 deadline to agree to a deal.