Harbour Investment Outlook

Key market movements

• Global equities continued their strong run in August, returning 2.5% in unhedged NZD terms and 2.0% NZD-hedged, their fourth month in a row of gains. Equity market performance broadened, with investors rotating away from the mega-cap technology companies and into small-cap stocks. 
• The New Zealand equity market posted a modest gain, with the S&P/NZX 50 Gross Index (including imputation credits) returning 0.9% for the month. The June reporting season produced mixed results, with aggregate earnings forecasts trimmed. Defensive sectors led performance, while consumer discretionary and information technology sectors lagged.
• Bond markets also rallied in August. New Zealand bonds rose 1.2%, supported by a dovish pivot from the RBNZ at its Monetary Policy Statement, cutting the OCR by a further 25bps. Global bonds posted a gain of 0.5%, weak jobs data increased expectations of a Fed rate cut in September with the US 10-year Treasury yields falling 15bp over the month.

Key developments

US labour market weakness increased the prospect of Fed rate cuts, overwhelming tariff-related inflation risk. Just 73k jobs were added in July and given substantial negative revisions to June and May, the US labour market added just 35k jobs per month between April and July. The unemployment rate rose to 4.2%, from 4.1%. At his Jackson Hole Economic Symposium speech, Fed Chair Powell noted that “downside risks to employment are rising.” Following the July data, markets ascribed an 80-90% chance of a Fed rate cut in September vs. 40% prior to the data, and a total of 50-60bp of easing this year, vs. 30bp prior.

The RBNZ recognised the need to provide more stimulus to the ailing NZ economy by cutting the OCR by 25bp to 3.0% at its August MPS decision and implying two more rate cuts this year. Another part of the RBNZ’s dovish pivot was that two members of the Monetary Policy Committee preferred to cut the OCR by a larger 50bp. While the market has moved to price an OCR low consistent with the new forecasts, it appears to ascribe little chance of a more negative scenario with the market implying the hiking cycle to start in the second half of next year.

The external sector remains the bright spot and along with lower interest rates, may play a role in the overall economic recovery. Our primary exporters continue to enjoy historically high revenue and a positive outlook, despite a 15% US tariff which we think is unhelpful but not disastrous. As if a record-high farmgate milk price of $10.15/kgMS wasn’t enough, Fonterra shareholders have been given an additional boost from the sale of the consumer business which may see as much as $400,000 paid to the average shareholder in the first half of next year. Farmers had already been looking more confident, with an increase in borrowing in the past two months and a small reduction in cash balances. This will be an important part of the economy to monitor and gauge the degree to which it is contributing to a broader improvement in economic growth.