Fed speechs, Australian election outcome to impact NZ markets
By Jenny Ruth
May 20 (BusinessDesk) - A plethora of United States Federal Reserve speakers at the Atlanta Fed's annual meeting this
week ought to shed further light on where global interest rates are going.
And the reaction to the Liberal Party's surprise win in Australia's federal election is likely to spill over into New
Zealand markets.
Fed chair Jerome Powell will speak on Monday evening and a dozen or so other Fed representatives are scheduled to speak,
says Mark Lister, head of wealth research at Craigs Investment Partners.
Although the minutes of the Fed's last meeting will be released on Wednesday afternoon, the speeches at the Atlanta
conference should provide a more up to date view of the Fed's collective thinking, Lister says.
“There are two things that are kind of pushing against each other,” Lister says. While the Fed has said it is taking a
cautious approach to raising interest rates, trade tensions are increasing.
While previously markets had been expecting China and the US to reach a trade deal, those expectations have been blown
away by recent developments.
“More tariffs will reduce growth, but it also means we might see higher inflation,” Lister says
The tariffs US President Donald Trump raised to 25 percent a week ago on about US$200 billion of Chinese imports will
raise the cost structures of a lot of US businesses, leading to lower economic growth but possibly more inflation.
“Powell's speech will be the clear highlight and markets will be looking for evidence of how the Fed might view the
recent rise in trade tensions,” Lister says.
“An increase in tariffs would have a negative impact on growth, while boosting inflation at the same time, so we will be
paying close attention to which side of the fed's dual mandate - stable prices or full employment - will be in focus
going forward.”
By the end of last week, financial markets had priced a 70 percent chance of a rate cut from the Reserve Bank of
Australia, in the full expectation that the weekend's federal election would result in a Labor government.
The surprise result, with Liberal leader Scott Morrison managing to hold on to government, is likely to mean a “relief
rally” in financial markets, Lister says.
“Labor's been ahead for two years. Everybody had assumed we were going to have a change of government. I talked to
nobody that was expecting the result we got,” he says.
Among the changes markets had been fearing, which now won't take place, had been the removal of franking credits –
Australia's system of crediting share owners with credits for the tax paid by the companies they invest in.
Australia's Labor had also promised changes to negative gearing, the system that allows Australian landlords to offset
losses from rental property against other income.
The removal of the threat of such policies should be good for Australia's flagging housing market and thus should be a
positive for the Australian banks – their big four banks own New Zealand's big four banks - and for building materials
companies.
Consumer stocks, such as Harvey Norman, JB Hi-Fi and Wesfarmers, are also likely to rally on the election results.
Building materials companies, such as BlueScope, CSR and New Zealand's Fletcher Building, are also likely to benefit
from the election outcome.
Other key events with the potential to move New Zealand's markets this week include the March-quarter retail sales data
due on Wednesday and the result of the latest Global Dairy Trade auction due early Wednesday.
The headline GDT index rose for the 11th consecutive auction last time. It is up 3.8 percent on a year ago and at its
highest levels since June 2017.
Economists expect the retail sales data will show an easing in growth to 0.6 percent in the March quarter from the
surprising 1.7 percent strength in the December quarter.
(BusinessDesk)
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