Shares fall as inflation heats up

New Zealand's main share index took yet another tumble on Thursday as inflation rose to its highest level in three decades and the US central bank offered very little detail on its future policy.

Thursday, January 27th 2022, 6:19PM

by BusinessDesk

The S&P/NZX 50 Index fell 135 points, or 1.1%, to 12,050.32. Turnover was $164 million.

US-focused church software company Pushpay led the index lower, falling 3.5% to $1.11, while travel software company Serko climbed 2.7% to $5.35.

Other significant falls came from Fletcher Building, down 3% at $6.54, and Ryman Healthcare which declined 3% to $10.20.

Vulcan Steel climbed 2.1% to $9.89, but most stocks were weaker as investors prepared themselves for higher interest rates.

The day began in NZ with a policy update from the US Federal Reserve at 8am, which contained little more than confirmation of what the market already expected.

Chair Jerome Powell batted away questions regarding whether the policymakers would consider 50-basis point hikes or hiking at every meeting.

Edward Moya, a senior market analyst at Oanda, said Powell’s comments during the press conference suggested he was willing to tighten policy faster if needed.

The S&P 500 had been up prior to the press conference but fell after the Fed chair declined to rule out some of the more drastic policy changes that could be used to kill inflation.

Later in the day, NZ had its own warning siren sound with consumer price index data showing inflation had risen to 5.9% – its highest level since 1990.

Peter McIntyre, an investment advisor at Craigs Investment Partners, said a high inflation number was “uncomfortable” for the Reserve Bank of New Zealand (RBNZ) which is responsible for keeping it near 2%.

He said higher interest rates were already forcing the market to recalibrate how assets are valued and investors were impatient to know how high rates will go.

Analysis by Forsyth Barr shows the average price-to-earnings ratio for the NZ market has already fallen to 26.8x in February, down from 30x late last year.

Low-interest rates were largely responsible for pushing the average price-to-earnings ratio so high – it is still 12% above the five-year average despite the recent decline.

Economists were divided on whether inflation will continue to rise and how the RBNZ should respond but agreed it increased the stakes for the central bank.

ASB senior economist Mark Smith said the RBNZ “clearly has more work to do” and the official cash rate might need to go higher sooner to get inflation under control.

However, Jarden economist John Carran said he expected the bank to continue with the incremental path it has suggested, although it may need to do more hikes in 2023.

“Because of moderating inflation and a slowing domestic economy, we do not see the RBNZ raising the official cash rate past 2% by the end of 2022,” he said.

The NZ dollar dropped to a new 15-month low, trading as low as 66.10 US cents late in the session after the Federal Reserve gave its update.

Currency exchange OFX said Powell’s commentary prompted markets to price in a 50-basis point hike next month and five rate hikes through 2022.

This had the effect of “catapulting the US dollar higher and driving the NZ dollar toward intraday lows not seen since November 2020,” it said in a note.

Made with Flourish
The weaker dollar could ultimately be a positive for some exporting stocks, such as Skellerup Holdings – up 1% at $5.88 today – or Eroad which earns mostly in US dollars and rose 1.9% to $4.40.

Shares in car dealer and financier NZ Automotive Investments fell 3.3% to 89 cents after it warned profits would be lower than last year due to slow December sales.

The company also said it had stock-piled low emission cars in preparation for a government rebate scheme which was supposed to kick off this year but has been delayed till April.

Restaurant Brands NZ was up 0.3% at $14.60 after it reported its annual sales had exceeded $1 billion for the first time, partly due to a $100m boost from its newly-acquired Californian stores.

Tags: Market Close