Harbour Outlook: An inflection point to come for earnings?

 

Key market movements

• Global equities were marginally positive in unhedged New Zealand dollar terms in February, with the MSCI All Country World Index (ACWI) increasing 0.3%. With the NZD losing previously made ground, returns in hedged terms were -0.8% for the month.
• Locally, the New Zealand equity market continued to weaken with the S&P/NZX 50 Gross Index (including imputation credits) down 3.0% in February. Australian equities also struggled with the S&P/ASX 200 Index down 3.8% (-3.1% in NZD terms).
• NZ bond returns were positive in February (+0.6%), measured by the Bloomberg NZBond Composite 0+ Yr Index. Global bonds did better with the Bloomberg Global Aggregate Bond Index (hedged to NZD) up 1.2% as US 10-year Treasury yields dropped further in the month to finish at 4.21%.

Key developments

The US economy may finally be starting to crack. Business surveys suggest the services sector is now contracting and real-time measures of Q1 GDP suggest the economy is in retreat. Retail sales were unexpectedly weak, and consumer confidence has dropped. The housing market is also showing signs of strain with both housing starts and sales dropping.

US government policy uncertainty appears to be having an impact on the economy, in addition to high interest rates. Tariffs have been imposed on China but delayed for Mexico and Canada. Progress on extending tax cuts, for example, has slowed as the bill incorporates not just the tax cut extension, worth US$4trn over the next 10 years, but also significant changes in spending – an additional US$800mn of spending and US$2trn of spending cuts.

The RBNZ cut the OCR by 50bp to 3.75% and forecast a faster easing cycle than in the previous MPS, reaching 3.1% at the end of this year instead of 2027. This was well-anticipated by the market and, as such, reaction was limited. Governor Orr indicated in the press conference that further reductions of 25bp in April and May were likely – highlighting the central bank's confidence that inflation will remain well-anchored, despite a pickup in tradable inflation due to higher oil prices and a weaker NZD.