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All eyes in financial markets on the Fed on Thursday

Monday 16th September 2019

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Financial markets this week will be dominated by expectations about, not so much what the Federal Reserve will do, but what it will say.

“I would quite confidently say we will get a 25 basis point cut from the Fed,” says Mark Lister, head of wealth research at Craigs Investment Partners.

“It's not going to be about what they do on the day. It's going to be all about what they say, the forecasts and how much more cautious have they got from three months ago,” Lister says.

The market is voting with the weight of money – current pricing suggests a 97 percent chance of the Fed Funds Rate being cut by 25 basis points to a range of 1.75-2 percent.

The Fed's decision and commentary is due early Thursday morning, New Zealand time.

Two other major central banks, the Bank of Japan and the Bank of England, will also be announcing their latest monetary policy decisions later on Thursday but the market is expecting no change from them.

New Zealand's own Reserve Bank will be announcing its latest monetary policy decision almost a week later on Wednesday, Sept. 25 and the Fed's decision will likely have a bearing on its decision too.

One of the reasons RBNZ gave for its surprise 50 basis point cut in its official cash rate to 1 percent on Aug. 7 was weakening global economic activity.

RBNZ's monetary policy committee will have the benefit of some rear-view-mirror information because the June quarter GDP data will be released this Thursday.

A number of New Zealand companies will be reporting results or holding other events this week which could shed further and more up-to-date light on the domestic economy.

Briscoe Group, which owns the Briscoe's homewares and the Rebel Sport chains, is due to report its first-half results on Tuesday. Outdoor clothing retailer Kathmandu will report its annual results on Wednesday and the Turners Automotive second-hand vehicles business will be holding its annual shareholders' meeting on Wednesday.

In its advice to members as to how it will vote its proxies – it will support all resolutions – the New Zealand Shareholders' Association notes Turners' relatively flat results for the year ended June with revenue up 2 percent to $336.6 million and net profit down 3 percent to $22.7 million.

“We note that revenue has increased 3.45 times over the past five years from $97.3 million but net profit after tax has only increased 25 percent from $18.1 million,” NZSA says.

It notes the dividend has risen from 10 cents per share to 17 cents over the five years.

“The motor industry is a bellwether sector with sales rising and falling in relation to the general economy,” it says.

Fast-food operator Restaurant Brands, which is the franchisor for the KFC, Pizza Hut and Carls Jnr brands in New Zealand, KFC in Australia and Pizza Hutt and Taco Bell in Hawaii, is set to report its second-quarter sales on Thursday.

“They're all quite good indicators of what the economy's doing. They're all at that discretionary end of consumer spending,” Lister says.

The global economic outlook had been appearing to get ever more gloomy but the mood improved considerably in the past couple of weeks, largely due to a thawing in trade relations between the US and China with each making conciliatory gestures and agreeing to resume negotiations early next month.

That helped the S&P 500 Index in the US gain almost 1 percent last week after a 1.8 percent gain the previous week. Other markets around the world also rebounded.

However, the benchmark S&P NZX 50 Index shed almost 3.2 percent last week, wiping out most of the previous week's 4.3 percent gain.

Lister says that was mostly due to stock-specific situations, such as Z Energy's 15.6 percent share price slide after it warned its operating profit for the year ending March next year would be $60 million lower than its previous guidance at $390-$430 million.

Perversely, the improving trade and therefore economic outlook meant that a number of New Zealand stocks favoured for their relatively reliable and high dividend yields took a hit last week as investors bet interest rates around the globe may not fall as much as feared, at least for now.

For example, Mercury NZ shares shed 6 percent, Contact Energy shares fell 4.2 percent and Genesis Energy shares dropped 3.8 percent.


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