Fed unlikely to derail equity markets, weaken NZ dollar given risks to US rate-hike track

Thursday 17th December 2015

The US Federal Reserve's first interest rate hike in almost a decade is unlikely to derail equity markets and further increases may not weaken the New Zealand dollar as much as Reserve Bank governor Graeme Wheeler had hoped, market analysts say.

New Zealand's S&P/NZX 50 Index was up about 0.2 percent in midday trading, having gained about 9 percent this year. It reached a record high at the start of December.

The kiwi dollar has been volatile since the Fed decision and subsequent media briefing by chair Janet Yellen and was last at 67.54 US cents from 67.79 cents immediately before the announcement. It has fallen 13 percent this year. The trade-weighted index, down a more modest 7 percent this year, was last at 73.53, or almost 4 percent above the Reserve Bank's assumed average rate for the fourth quarter.

"If Graeme Wheeler was hoping for a Christmas present from the Fed decision, it has not eventuated," said Christian Hawkesby, head of fixed interest and economics at Harbour Asset Management. "The governor has been very open about wanting the Fed to finally get on with it and raise the fed funds rate, in the hope this would weaken the NZ dollar."

The Christmas present would have included a more aggressive signal on further rate hikes by the Fed because like the US, New Zealand inflation has been stubbornly below the central bank's target, mainly as a strong kiwi dollar kept import prices lower. "The quickest route back to the goal for CPI inflation is to have a sharp depreciation in the currency," Hawkesby said.

The Fed's economic projections were largely unchanged from its September forecasts, with the so-called "dot plot" path for interest rates continuing to signal it planned to raise rates four times next year to take the benchmark 1 percentage point higher.

On Wall Street, the Standard & Poor's 500 Index ended the session up 1.5 percent as investors took the Fed's position as a sign of confidence in economic growth, with risks to its "gradual" tightening cycle from inflation taking longer than expected to return to its 2 percent target. In the Asia-Pacific region today, Australia's S&P/ASX 200 Index gained 1.8 percent in the first hour of trading.

"I don't think it will completely de-rail this positive market we've been in for a few years, but it will definitely slow it down, and that probably will filter through to what's happening in the local market," said Mark Lister, head of private wealth research at Craigs Investment Partners. "The last four or five years have been very strong in New Zealand, as they have elsewhere, and I think the next couple of years the pace of gains will certainly be slower. We'll be looking at single digit returns, not double digit returns."

Wheeler called the strength of the New Zealand dollar "unhelpful" when he cut the official cash rate a quarter point to 2.5 percent on Dec. 10, while softening his language about the prospects of any further cuts. That sparked what Harbour Asset's Hawkesby called "a hawkish reaction", with the kiwi initially jumping and local bond yields rising.

"This makes it harder for the RBNZ to get CPI inflation back to the 2 percent mid-point of its target range," he said. "In our view, that raises the chances of further OCR cuts in 2016."

BusinessDesk.co.nz

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