Monday 19th August 2019
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Domestic listed company results will dominate the news flow in New Zealand this week and investors will be paying particular attention to outlook statements to see if chief executives see any sign of recession or whether they think the economy's just going through a soft patch.
The two-year US Treasury note yield rose above the yield on the 10-year bond last week. Such an inversion, if sustained, often heralds a recession and has given investors around the world a bad case of the jitters.
The results of the latest GlobalDairyTrade auction should also provide more evidence of whether Chinese buyers are being impacted by the uncertain environment, including the trade war between China and the US and the devaluation of the yuan.
Manufacturing data for August for many of the world's global economies including Japan, Europe and the US will be anxiously watched to see whether the weakness shown in the July figures continued.
But perhaps the biggest event affecting the global economy this week will be Federal Reserve chair Jerome Powell's speech to the annual gathering of central bankers at Jackson Hole in Wyoming on Friday.
“You look at the picture of data globally and here in New Zealand and there's a clear slowdown taking place,” says Mark Lister, head of wealth research at Craigs Investment Partners.
“Economic growth is a key driver of corporate earnings – there's a clear relationship between growth and the potential for a slowdown or a recession,” he says.
“The outlook comments will be key, particularly from those at the most sensitive parts of the economy.”
These companies will include Fletcher Building, which reports its annual results on Wednesday, for insights into what's happening in the construction industry, both in New Zealand and in Australia.
A2 Milk, which also reports on Wednesday, may shed some light on what's happening in China, a key market for its infant formula, although that company has been gaining market share so may fare well regardless of the state of the market.
Air New Zealand and Auckland International Airport, which both report their annual results on Thursday, will provide some insights into how the tourism industry is faring.
The GDT results due early Wednesday come after a 2.5 percent drop in the overall index at the last auction, which was a softer-than-expected result, although the index is still up 13.1 percent since the start of the year and 2.5 percent higher than where it was a year ago.
As for the global picture, the Performance of Manufacturing Index for Japan in July was hit by weak demand from China and increasing tensions with South Korea while the Eurozone PMI was the weakest in more than six-and-a-half years and the US PMI was the lowest since September 2009.
This week's data for August will show whether that weakness continued and will form a backdrop to Powell's speech.
Lister says this will be “a significant communications challenge” for Powell and that current market pricing suggests a Fed rate cut next month is a certainty and that it will cut 105 basis points over the next 12 months.
An inverted yield curve in the bond market, which suggests the collective wisdom of investors is that current exceptionally low interest rates will persist well into the future, tends to be a reliable indicator of depressed growth.
“What it's not good at doing is indicating the timing – just because that's happened, it isn't necessarily a sign of something on our doorstep,” Lister says.
The theme of this year's Jackson Hole meeting is “challenges for monetary policy.” Markets will be looking for Powell to clarify whether the Fed is at the start of an easing cycle or whether last month's rate cut, the first since the GFC, was just insurance against an economic downturn.
Lister says President Donald Trump, who started the trade war with China last year and has threatened to impose tariffs on the products of US allies as well, is a wild card.
“We all know how fickle Trump can be,” he says, pointing to Trump's decision to impose tariffs on another US$300 billion of Chinese imports from Sept. 1, followed by his decision earlier this month to delay those tariffs until mid-December.
His reason for doing so was to “save Christmas” for US consumers, even though Trump continues to insist that its the Chinese who are paying the existing tariffs, not US consumers.
“He can change his mind very quickly if he sees something on the horizon that's going to affect his election prospects.”
Also this week, local retail sales data due on Friday should help fill in the picture of how the economy fared in the June quarter, given falling business and consumer confidence.
“Retail sales were solid in the March quarter, driven by higher spending at department stores and on hardware and building materials,” Lister says.
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