Economy at risk of overheating

New Zealand shares and dollar both moved higher on Wednesday, reflecting labour market data that came in much stronger than expected as the recovery from the pandemic picks up pace.

Wednesday, February 3rd 2021, 6:31PM

by BusinessDesk

The official unemployment rate fell to 4.9 percent in the December quarter, significantly lower than the 5.9 percent economists had expected.

Stephen Toplis, head of research at BNZ, said market participants responded to the data release by buying the kiwi dollar and bidding long-dated bond yields higher.

The kiwi dollar was trading at 72.13 US cents at 5pm in Wellington, up from 71.71 cents yesterday.

The yield on a 10-year government bond also rose to 1.36 percent, having started the year below 1 percent, as investors began to price in the possibility the Reserve Bank of NZ will increase the official cash rate.

“If the current momentum in the economy is sustained then New Zealand will be in serious risk of overheating if monetary conditions were to remain as stimulatory as they now are,” Toplis said.

The Kiwi rates market has gone from pricing in a negative cash rate, just a few months ago, to expecting rate hikes to begin in the middle of next year.

“It’s becoming increasingly possible that the RBNZ will regret some of the stimulus measures that it put in place last year and could start to tighten policy sooner than we previously anticipated,” said Michael Gordon, a senior economist at Westpac Bank.

Despite the stronger economy, it was not all good news for the equity market, which has been priced for ultra-low interest rates and would likely move lower if rates start to rise.

The S&P/NZX 50 Index rose 46.71 points, or 0.4 percent, to 13,091.21. Within the index, 31 stocks rose, 14 fell, and five were unchanged. Turnover was $171 million.

Sky Network Television led the market higher, jumping 11.9 percent to 17.9 cents after hiking its revenue guidance for the 2021 financial year for a second time.

The company now expects revenue for the financial year to reach between $695 million and $715 million, up from November’s $680 million to $710 million estimate.

Fletcher Building climbed 2.4 percent to $6.45, likely buoyed by employment data showing the construction industry employed an extra 13,200 people in the December quarter.

Fonterra Shareholders' Fund units rose 0.4 percent to $4.54 after the dairy co-operative hiked its forecast payment to farmers, thanks to strong demand from Chinese and South-East Asian buyers.

A2 Milk fell 0.3 percent to $11.07, while its key supplier Synlait Milk fell 0.9 percent to $4.58.

Contact Energy posted the day’s biggest fall, dropping 1.9 percent to $8.25.

In currency markets, the trade-weighted index was at 75.03 at 5pm, from 74.54 yesterday. The kiwi traded at 94.76 Australian cents from 93.94 cents, 75.74 yen from 75.25 yen, 59.90 euro cents from 59.36 cents, 52.77 British pence from 52.36 pence, and 4.6562 Chinese yuan from 4.6323 yuan.

Tags: Market Close