RBNZ likely to highlight global uncertainty

Monday 26th November 2018

The Reserve Bank will be delivering its latest Financial Stability Report in the middle of a momentous week for the global economy.

“I think all that international stuff will be top of their list – it's top of my list and it really is unclear as to how it will all play out,” says Mark Lister, the head of wealth research at Craigs Investment Partners.

“Those global risks have definitely gotten worse compared to six months ago,” Lister said.

“Global growth has come off quite a bit, particularly in China, which is our most significant trading partner.”

As for what's coming up, Federal Reserve chair Jerome Powell will have delivered a speech to the Economic Club of New York just ahead of our central bank's report and the market will want to know whether Powell still thinks the Fed is “a long way from neutral,” as he said it was in October.

A day after the RBNZ report, the Fed will release the minutes of its last meeting.

Lister says Powell is unlikely to be influenced by US President Donald Trump complaining that he's raising interest rates, but the market will be wanting to know whether recent developments have affected the outlook for US rates.

“No matter what happens, the Fed will hike in December because they will lose credibility otherwise,” he said.

The odds of a rate hike in December have fallen a little, but financial markets are still pricing in a 73 percent chance.

“The question is, do they have a softer tone going into 2019,” Lister said.

Another thing the Reserve Bank won't know is whether Trump and his Chinese counterpart Xi Jinping will do or say anything to soothe or escalate trade tensions when they meet at the G20 leaders' summit in Buenos Aires.

But it will have plenty of evidence that global share markets are very jittery – the benchmark S&P 500 Index shed almost 4 percent during the Thanksgiving-shortened last week and our own NZX50 Index fell 1.2 percent.

The S&P 500 Index is now more than 10 percent off its 2018 high and the NZX50, which measures dividends as well as share prices, is about 7.2 percent lower.

China's Shanghai Composite Index is 27.5 percent down from its 2018 high and the MSCI Emerging Markets Index is almost 24 percent lower.

And the price of oil as measured by West Texas Intermediate is at its lowest level in a year, having crashed 34 percent in the past seven weeks while Brent Crude has fallen as much as 32 percent.

That's amid record shale oil production in the US, making it the world's largest producer, and record production in Saudi Arabia, egged on by Trump likening lower oil prices to a tax cut for American consumers, amid the political sensitivities surrounding the murder of Washington Post columnist Jamal Khashoggi.

But demand from China for gasoline dropped to its lowest level in 13 months, according to Reuters, an indicator that the US trade sanctions are biting, and other reports point to slowing global growth, including a report in Germany on Friday showing that country's growth is at its weakest in four years.

All in all, the global picture has become much cloudier since the central bank delivered its last financial stability report six months ago.

“I think the Reserve Bank will be singing from the hymn book that a lot of it is quite uncertain and there's only so much our government or Reserve Bank can do to position us for that,” Lister said.

Household debt and dairy farmer indebtedness were the other things that were worrying the central bank six months ago and will probably still be on its mind, although “they will be happy that the Auckland housing market has done absolutely zip in the last 12 months.”

The central bank's comfort that the housing market has cooled considerably is widely expected to lead to a further easing of its loan-to-valuation restrictions.

However, the central bank is likely to be concerned about the recent trend in global dairy prices and their implications for dairy farm profitability. At last week's GlobalDairyTrade auction, the headline index fell for the seventh consecutive time and is now back at August 2016 levels and down 9.6 percent since the beginning of this year.

(BusinessDesk)

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