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Data this week offers signposts on recession risk

Monday 1st April 2019

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The big question facing financial markets is whether the United States, and therefore the global economy, is heading into recession

Key data which will help confirm or refute the signals that bond markets are currently sending is due out this week, including US retail sales and manufacturing figures later today and non-farm payrolls on Friday.

As for those bond market signals, three-month US Treasury bills have started trading at higher yields than those of 10-year Treasury bonds. That's a classic sign - if sustained - that recession is nigh.

The local impact has been to take the yield on 10-year swap rates to record lows – they bottomed at 2.02 percent on Thursday last week and ended the week at 2.1450 percent.

“We've got quite an important week of US data coming,” says Mark Lister, head of wealth research at Craigs Investment Partners.

“We've got all these signposts that are pointing to trouble ahead,” Lister says.

The data so far this year has been quite ugly. The key US index of manufacturing activity fell to its lowest level since late 2016 last month and a very weak report showed the US economy added just 20,000 jobs in February - well below forecasts.

“We've been able to blame that on the government shut-down, but we can't do that anymore,” Lister says.

In addition, weaker results and outlook comments reported by international parcels business Fedex have suggested a slowdown in global growth.

One of the reasons New Zealand's interest rates have fallen is the Reserve Bank's bombshell announcement last Wednesday that the next move in its official cash rate is likely to be down.

In February, the local central bank had said the OCR probably wouldn't move until well into 2020 and that then it could move either up or down.

The Reserve Bank was following on from the surprise about-face from the US Federal Reserve, which went from expecting to continue raising interest rates to no more rate hikes this year. There have been similarly dovish statements from other central banks including the European Central Bank.

A key concern of our Reserve Bank was that the increasingly gloomy tilt of other central banks had been pushing the New Zealand dollar higher.

Its statement pushed the local currency down about a US cent.

Against that backdrop, the Reserve Bank of Australia's next cash rate decision, due Tuesday afternoon, will be watched more closely than usual.

“If all those concerns that the RBNZ sees are valid, you would think the RBA would see them too,” Lister says.

“If the RBA doesn't follow suit, I think the Australian dollar could spike up, but the market has already decided they're going to be quite dovish too,” he says.

On the local front, Tuesday's quarterly survey of business opinion from the NZ Institute of Economic Research will probably confirm the results of ANZ Bank's monthly survey which have shown businesses are getting ever gloomier.

“We will probably see a decline – potentially quite a sharp one – in sentiment from the QSBO this week,” Lister says.

“Among other things, the February release of the final report of the Tax Working Group is likely to be causing some anxiety amongst the business community during the survey period,” he says.

But it isn't all doom and gloom – for one thing, commodity prices are still travelling well, particularly the key Global Dairy Trade Index.

It has risen in each of the last eight fortnightly auctions and dairy farmers will be hoping for another good result from the latest auction due early Wednesday.

Lister notes that the main GDT index is 21.1 percent higher than it began this year and at its highest levels since September 2017.

“On a less positive note, a key reason for the strength in prices is lower milk production on the back of dry weather during recent months, in particular in the North Island,” he says. 

You certainly wouldn't think a global recession was on the cards from looking at global equities markets, although one of the reasons they keep rising is falling interest rates.

The benchmark S&P 500 Index gained 13 percent in the March quarter, along with other key markets around the world. Even the Brexit-benighted British FTSE Index managed an 8 percent March quarter gain.

New Zealand's S&P/NZX 50 Index gained 12 percent and five of the top 10 gainers are all utilities offering significantly higher dividend yields than available in money markets.

Shares in Meridian Energy were the third-highest gainer, for example, up 25 percent, followed by phone lines company Chorus, up 23.6 percent and Genesis Energy, up 23.4 percent.

(BusinessDesk)



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