It has been a pretty good period for equities over the last six weeks or so, with the NZX up 9% since the start of July, matching similar stories in Australia and the US.
Last week stocks picked-up on headline news that in the United States the consumer price index rose at a slower pace than recorded the previous month – reporting that inflation increased by an annual rate of 8.5%, a slower pace than a 9.1% increase in June – coming in under analysts’ expectations. But as CNN phrased it, things aren’t quite as promising when we take a peek under the hood.
This accords with sentiment expressed by Milford Asset Management in their fund updates this month that inflation is unlikely to dissipate as quickly as market participants expect.
The US Federal Reserve delivered back-to-back 75bp interest hikes in June and July, and further increases are on the cards until the data shows that inflation is really slowing.
In contrast, US wholesale interest rates have fallen significantly as the market focuses on weaker growth prospects rather than concerns over potentially stubborn core inflation pressures.
This has flowed through to the New Zealand market which has followed suit. Wholesale interest rates have fallen recently, yet domestic inflation pressures are intensifying. Take for example private sector wages, which grew by 7% over the year to June.
This won’t be pleasing the US Fed, it won’t be pleasing the RBNZ and it all seems far too premature.
I think Milford Asset Management are bang on the mark in their remark that inflation is unlikely to dissipate as quickly as market participants expect. They expect company profits to be under pressure for some time owing to the weaker economic outlook and margin squeezes.
KiwiSaver and managed funds have benefitted from the recent rally in equities. This is good news for investors, but of course we’re still in for a bumpy period ahead.
I’ll be interested to see the Reserve Bank’s take on things in tomorrow’s Monetary Policy Statement.