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Roaring bulls and a flying kiwi
- The themes of April continued through May.
- Sharemarkets performed well and bond yields rose further during the month.
- And the New Zealand dollar continued to strengthen, hitting fresh highs against the US dollar.
Global sharemarkets rallied in May, with all the main markets posting gains. The NZX 50 index has set new 2007 highs, and posted a 2% gain for the month. Across the Tasman, the Australian economy continues to perform well, and their sharemarket returned 3% for the month. The Aussie economy expanded an impressive 1.6% in the first quarter, and the outlook is good for future growth. The US sharemarket continued to perform well, with all the main indices posting solid gains of 3% to 4% for the month. The upward pressure on US rates continued in May, with the benchmark US 10-year Government bond yield rising 25 basis points. This is a big movement for one month – and takes US rates back to the highs seen in early 2007. Local long-term NZ fixed interest rates rose over May, reflecting the Reserve Bank’s hawkish stance on interest rates, and ongoing mortgage fixing activity from banks. High New Zealand yields remain attractive, and offshore investors continued to show interest in buying NZ dollars to access investments. The NZ dollar hit a post float high of US $0.7493 in April, and broke that level on June 6 to set a fresh high of USD 0.7552. However, for the period captured in the report table, the NZD actually eased slightly. We expect the currency will continue to show strength over the coming months. At this level, life becomes difficult for many New Zealand exporters, and first quarter earnings reports for several NZ companies released in May expressed their concerns about the currency’s impact. This looks likely to continue over the coming quarters. We expect the NZ dollar to eventually retreat from these levels, but New Zealand’s high interest rates mean that this process may take some time. Although we expect a lower NZD by year end, there is still a risk the currency presses higher in the short term.
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Cash
- The RBNZ raised the official cash rate (OCR) on March 8th then again on April 26th.
- The OCR now stands at 7.75%, and could rise further in the coming months.
- The NZ 90-day rate steadily increased in the run up to the meetings, and through May. 90-day Bank Bills are now trading at the highest level since the OCR was introduced in 1999. The 90-day bill rate ended the month at 8.13%, up 6 basis points.
- The two recent rate hikes will reduce the risk of an unsustainable rebound in domestic spending activity. Financial markets are currently pricing an 80% probability of an increase in the Official Cash Rate in the coming months.
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Fixed Interest
- Local long-term fixed interest rates rose over May, with the 10-year NZ Government Bond yield rising 26 basis points.
- Continued mortgage fixing activity from banks saw wholesale swap rates rise 10 to 20 points.
- US rates continue to rise. 10-year yields rose a huge 25 points in the month, building on the rate increases in March and April. Volatility continues as a result of conflicting concerns about the slowing US economy, but still-present inflation risks. On balance, we expect US long-term rates can edge higher.
- US 10-year Government stock is now trading around 4.93% in early June. The NZ 10-year rate is trading above 6.50%, and the NZ 5-year rate has broken above 7% for the first time since 2000. We expect a period of volatile sideways action in interest rate markets, including NZ rates.
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Equities
- May was positive for global shares, with all the major markets posting gains.
- The US market leads the charge, with the Dow Jones Index hitting another fresh high, and gaining 4.3% in May.
- The Australian and New Zealand sharemarkets both performed well, and have also set new highs, gaining 3% and 2.1% respectively in May.
- The NZD eased over the month of May, enhancing the returns for the month.
- The MSCI index of world shares posted a 2.5% return in US dollars or 3.4% in New Zealand dollars for the month.
Exchange rates
- The NZ dollar has rallied through April and May, and set a post float high of US $0.7550 at the time of writing in early June.
- The NZ dollar traded between USD $0.72 to 0.75, and AUD $0.87 to $0.89 during the month.
- Many exporters struggle with the exchange rate at these levels.
- Business confidence has fallen lately, partly in response to the high exchange rate and interest rates. Our 12-month outlook is for a lower NZ dollar. However, the ongoing tightening bias from the RBNZ is expected to hold up the NZ dollar for the coming months.
- We expect the local currency will continue to trade between USD $0.72 and 0.75 for several months.
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Report Prepared by:
Chris Tennent-Brown
NZ Economist
Phone: (649) 374 8819
Facsimile: (649) 302 0992
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