Higher unemployment spurs interest in NZX50

Investors continued to hone in on A2 Milk today after last night's flurry of speculation over its access to the US, while weaker jobs data had some analysts predict a slower pace of rate hikes, increasing the allure of companies offering reliable dividends

Wednesday, August 3rd 2022, 6:02PM

by BusinessDesk

Late yesterday, A2 noted media speculation that it was nearing approval from the US Food and Drug Administration but said its application to sell infant formula in the US was still being reviewed.

The stock, however, added another 0.9% to $5.47 as investors focused on the fact that A2 said it was under “active” review. The stock lifted more than 8% late yesterday on the news.

Hobson Wealth director Brad Gordon said, however, said “it was a bit of an overreaction on the upside”.

He noted that it was still unclear whether A2 would be approved, whether approval would be temporary or permanent, or what the potential sustainable earnings from the US market were.

“It is a very different market to the higher margin China market it has been focused on to date,” he said.

The S&P/NZX 50 index gained 172.57 points, or 1.5%, to 11,705.03. Turnover on the main board was modest at $127.4 million.

"Today is really an interest rate story”, said Gordon.

Earlier, Stats NZ said unemployment held steady at 3.3% in the June quarter versus 3.2% in the March quarter.

The figure was slightly higher than the market had expected “and bad news is good news for the market,” said Gordon.

If today’s data indicated the labour market was starting to turn, it may mean interest rates don’t have to push as high as anticipated.

According to BNZ economists, “the detail of today’s report suggests the labour market might be softening even faster than the Reserve Bank has anticipated”.

Annual wage inflation – as measured by the labour cost index (LCI) – rose 3.4% on the year, with private sector wages up 3.4% and public sector wages up 3%.

The June quarter had the largest increase in labour cost index salary and wages rates since late 2008, according to Statistics NZ.

BNZ noted that ongoing wage inflation would have a major bearing on future CPI inflation and “only when wage inflation abates will the RBNZ feel it is completely winning the game”.

While that argued the Reserve Bank must continue to push ahead with its general rate hike agenda, “what the data today do not argue for is an acceleration of that process”.

The central bank is widely expected to lift the official cash rate by another 50 basis points to 3.0% on Aug 17. Some economists had said a 75-basis point increase was on the table.

“Talk of a 75-basis point increase at the August meeting should now be beaten into submission,” BNZ said.

Gordon noted that high-yielding stock benefited from the stronger unemployment as lower interest rates mean that equities are more attractive.

Summerset Group led the market, up 3.4% at $11.11 and power company Meridian Energy advanced 3.3% to $5.215.

Chorus added 1.5% to $8.05, Auckland International Airport was up 1.5% at $7.60 and Fisher & Paykel Healthcare rose 1.3% to $21.49.

Fisher & Paykel Healthcare may have also benefited from the weaker New Zealand dollar.

The NZ dollar was trading at 62.55 US cents at 4:30 pm in Wellington, down from 62.92 cents Tuesday.

The labour data weighed on the kiwi dollar, which was already weaker after the greenback got an overnight lift after Federal Reserve speakers reminded markets of plans to tighten a lot further to bring inflation to heel.

On another front, Third Age Health Services added 14% to close at $2.05.

The stock fell sharply after Third Age Health Services said on Friday that the high court in Napier appointed liquidators to Third Age Digital Health over a $313,000 loan owed by the digital firm to the aged care company.

The company, however, was quick to underline its differences to the digital health firm.

The NZX-listed aged care provider said it’s not involved in supplying any services to Third Age Digital Health and, while they have some common shareholders, their only link is an outstanding debt owed by the digital firm.

Infratil rose 1.6% to $8.89 after analysts were upbeat about news that its Longroad Energy investment has agreed to sell a 12% stake to German insurer Munich Re for US$300 million.

Forsyth Barr analysts are calling the deal “potentially one of the most significant events in Infratil’s long history” while Craigs Investment Partners analysts likened the Longroad revaluation to Infratil’s investment in Tilt Renewables, dubbing it “Tilt Mark II”.

Infratil completed the sale of its Tilt stake for nearly $2b in August last year, more than $1b of that being profit.

On another front, units in the Fonterra shareholders fund were unchanged at $2.95, while Synlait Milk shares increased 0.9% to $3.31.

Dairy prices fell 5% in the overnight Global Dairy Trade auction.

Whole milk powder (WMP) prices have fallen for 10 auctions in a row. Over that time, WMP prices have plunged 30%, while overall prices are down 27%.

While the weaker dairy prices could see a lower payout for farmer shareholders and suppliers, they are good news on the input side of the equation for dairy companies.

Rural services firm PGG Wrightson fell 2.7% to $4.28 while farm owner NZ Rural Land Co declined 2.9% to $1.02.

Fletcher Building rose 3.3% to $5.28 ahead of the Commerce Commission's draft report into building products on Thursday. Vulcan Steel advanced 3.5% to $10.05 and Steel & Tube was unchanged at $1.35.

Precinct Properties posted the biggest decline on the NZX50, falling 2.4% to $1.41.

Tags: Market Close