Equities fall as inflation expectations rise

New Zealand equities pulled back again on Tuesday as a Reserve Bank survey showed rising inflation expectations, prompting bond yields to step higher as the market priced in the risk of interest rate hikes.

Tuesday, February 9th 2021, 7:13PM

by BusinessDesk

The S&P/NZX 50 Index fell 126.18 points, or 1 percent, to 12,927.69.

Within the index, 27 stocks fell, 20 rose and three were unchanged. Turnover was $161.5 million. Senior Westpac economist, Satish Ranchhod, said longer term inflation expectations - which rose 30 basis points to 1.89 percent - are a key focus for the central bank’s Monetary Policy Committee.

Ranchhod said this suggested there may be more inflationary pressure than the RBNZ had “factored in” to its previous policy review last November.

“Market thoughts are starting to turn to the timing of RBNZ hikes, but we still think that is years off,” he wrote in a note.

Even if economists expect the official cash rate to stay low, market expectations of rising rates are already throwing cold water on the red-hot equity market.

The two-year swap rate has climbed to 0.36 percent, from negative levels just three months ago.

The 10-year swap rate is now at 1.4 percent, up from 0.48 percent. NZ’s benchmark equity index has fallen 1.1 percent this year and is close to 5 percent off its highwater mark on Jan. 8 — the decline largely coinciding with rising bond yields.

ASB economist Chris Tennent-Brown said there is less need for monetary policy support as the economy recovers and so interest rates are rising.

“Only a few months ago we were talking about the likelihood of a negative official cash rate. Now markets are beginning to price in the possibility the RBNZ raises the official cash rate next year,” he said.

Still, Tennent-Brown said equity prices had run up to high levels during the holiday period and didn’t attribute the pull back to interest rates alone.

“I think the Reserve Bank meetings over the next couple of months will be really important, but they won’t want to see rates racing up,” he said.

Travel software firm Serko led the share market lower today, down 3.5 percent at $5.60, although on an extremely light volume.

Fisher & Paykel Healthcare was the most significant drag on the index, falling 2.8 percent to $32.57. Electricity firms that have been responsible for much of the recent pull back, both continued to decline.

Meridian Energy was down 2.2 percent at $6.835 and Contact Energy fell 1.8 percent to $8.00. Domestic courier company Freightways posted the day’s biggest rise, climbing 4.2 percent to $11.20.

Global logistics firm Mainfreight edged up 0.3 percent to $67.51 after Forsyth Barr predicted it could hit $100 a share within four years. Air New Zealand fell 0.3 percent to $1.625 after landing itself in hot water over supplying turbines to the Saudi military.

The kiwi dollar broke through 72 US cents following the RBNZ’s survey predicting stronger inflation.

It was trading at 72.48 US cents at 5pm in Wellington, up from 71.45 cents on Friday. The trade-weighted index was at 75.10 at 5pm, from 74.56 last week.

The kiwi traded at 93.80 Australian cents from 94.10 cents, 76.02 yen from 75.41 yen, 60.01 euro cents from 59.76 cents, 52.60 British pence from 52.25 pence, and 4.6739 Chinese yuan from 4.6275 yuan.

Tags: Market Close