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Why central banks are back in the spotlight

OPINION: Well, that was October, and in the end it wasn’t the fright for investors that some were predicting. The volatility that has often been seen historically during the month was largely absent.

Investor optimism grew during the month, led by the US where the key indices all made fresh record highs on Friday. The S&P500 and Nasdaq both surged around 7 per cent during October, and had their best month since November 2020 after Donald Trump was voted out of the White House.

Propelling the indices higher has been a very strong reporting season, with a few notable exceptions (Amazon and Apple fell short), and despite inflation and supply chain headwinds being common themes.

Around half of the S&P500 companies have reported quarterly results and more than 80 per cent have beaten expectations. Bottom lines are growing at a breakneck pace, with constituents within the index expected to grow profits by nearly 40 per cent year over year.

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Blue chips that have been on the right side of the earnings season have done very well to date. Tech titan Microsoft was up 17 per cent for the month, and Tesla, boosted by the EV deal with Hertz, surged around 40 per cent during the month, pushing its market value to over ÙS$1 trillion. The earnings season rolls on this week, with a further third of the S&P500 companies due to report.

All this is while data on the US economy has been relatively soft. Growth in the world’s largest economy slowed to an annualised pace of 2 per cent in the September quarter, well down from the 6.7 per cent delivered in the proceeding three months.

Rising Delta cases took their toll, but these have gone into reverse (new cases last month have fallen to less than half of those during the most recent pandemic peak in September). This sets the scene for a strong economic bounce in the current quarter (a lift of around 8 per cent is forecast). This Friday’s non-farm payrolls report will be closely scrutinised for confirmation of an improvement in hiring amidst the reopening of the economy.

This will all be up for consideration at the Federal Reserve’s meeting later this week. The central bank is widely expected to announce the commencement of a ‘tapering’ initiative whereby monthly bond buying (currently US$120 billion a month) will be clipped by around US$15 billion.

As always, markets will be focussed on the tone coming out of the meeting and will be looking for signals that the economic outlook is strengthening, but not so much that current inflationary pressures are going to spiral out of control.

This is the delicate bouncing act which central banks globally are involved in, including the Reserve Bank of Australia which meets tomorrow on Melbourne Cup Day. While Australian officials are already off and running with their QE taper, all bets may soon be off on their timeline for raising rates (not until 2024) which looks increasingly questionable given last week’s inflation numbers – core inflation in the September quarter rose at the fastest level in 6 years.

Much like the Aussie market, the NZX50 underperformed during October (despite a 1 per cent lift on Friday), falling around 1.3 per cent for the month. Perhaps contributing to this has not only been the Delta-driven economic knock, but the fact that interest rate tightening has already begun here.

Our central bank was one of the first globally (beaten only by Norway) to raise rates, and the prospect of another lift in a few weeks’ time looks all but certain. But other central banks are set to play catch up, and as inflationary pressures continue to mount – the Bank of England also meets this week, with what looks like a 50/50 chance of a rate hike for the first time since 2018.

Results the two big banks - ANZ last week, and Westpac today - have reinforced that the NZ economy is in a good place.

Stacy Squires/Stuff

Results the two big banks – ANZ last week, and Westpac today – have reinforced that the NZ economy is in a good place.

The strong state of the economy is likely to be reflected in our own jobs numbers which are due on Wednesday. The unemployment rate at the end of September is expected to have fallen to the lowest since June 2008. The extended lockdown in Auckland may have an impact in October, but while business confidence (per an ANZ survey) has slipped, investment and hiring intentions have remained relatively firm, which bodes well for a rebound in activity as and when Covid restrictions are moved (and hopefully) by early December.

Many parts of the economy are doing well including the export sector, with Fonterra last week forecasting one of the highest milk price pay-outs ($7.90 to $8.90 per kilo of milk solids) in the co-operative’s existence for this season. This is good news for dairy farmers, and there is another global dairy trade auction on Wednesday.

Results the two big banks – ANZ last week, and Westpac today – have reinforced that the NZ economy is in a good place. ANZ reported a 44 per cent increase in profit for local operations to $1.9 billion. Westpac NZ saw a 56 per cent increase in cash earnings to $1.01 billion. Robust lending volumes on the back of a buoyant housing market, and a partial unwinding of Covid provisions were a feature of both results.

Westpac shares didn’t react so well to the results, after the group’s share buyback of A$3.5 billion fell short of expectations. Costs rose more than expected and the bank is having to compete more on lending rates to retain market share it seems. The fall in the share price however seems more down to a correction back to level pegging with other peers – Westpac shares had outperformed year to date.

On the subject of competition, the Commerce Commission’s virtual conference on competition within the grocery market is drawing to a conclusion tomorrow. Submissions have been prompted by a desire to address the fact that kiwi grocery bills are amongst the highest in the world (and 6th most expensive in the OECD).

A point wade made again during today’s sitting that since the genuine establishment of Aldi across the Tasman, grocery prices there have fallen 13-30 per cent.

Ralph Orlowski/Getty Images

A point wade made again during today’s sitting that since the genuine establishment of Aldi across the Tasman, grocery prices there have fallen 13-30 per cent.

Not surprisingly the position of the incumbents is that there is already sufficient competition in the sector that that there is no merit (and it would create inefficiencies) in having a third player. On the other side, market studies have shown that the current duopoly has both Foodstuffs and Countdown making ‘persistent’ supernormal profits.

There has been agitation for regulatory intervention, and forced divestments through a competitive process. Leading the call has been 2Degrees founder Tex Edwards (no stranger to disrupting a duopoly), who has put his hat in the ring through the Northelia Group. There are certainly some strong arguments for change (who doesn’t want a lower grocery bill?). A point wade made again during today’s sitting that since the genuine establishment of Aldi across the Tasman, grocery prices there have fallen 13-30 per cent.

While much work needs to be done on the framework, it does look like that the winds of change are starting to blow in the supermarket sector. If done right it could well put some dollars back into consumers’ pockets.

Greg Smith is the head of retail at Devon Funds Management.



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