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Episode details

Brendan Larsen
Good morning, its Monday 10th April and I’m Brendan from Milford Asset Management.

Despite a shortened trading week given holidays, there was plenty for investors to get their teeth stuck into.

Both the RBA and RBNZ monetary policy committees met last week, and the extent of divergence in policy became very clear.

The RBA chose to keep the cash rate on hold at 3.6%, with a dovish change in language suggesting further tightening may be needed, versus the March language that further tightening will be needed. Governor Lowe has been vocal about the long and variable lags of monetary policy, hence after 10 months of tightening, the committee clearly feel like the best approach is to take stock of the tightening done to date. This comes despite the economy operating with close to a 50-year low in unemployment and inflation still well above target.
In complete contrast to this approach, the RBNZ surprised the market by hiking the cash rate by 50 basis points to 5.25% despite markets pricing in a 25 basis point increase. This RBNZ outlined key drivers of the hawkish surprise being; inflationary impacts from cyclone Gabrielle which are expected to be worse than initially feared, as well as a global decline in wholesale rates. The RBNZ essentially want to ensure that mortgage rates in New Zealand remain higher around 6.5-7% over coming months given the large amount of re-fixing expected to occur, which will help dampen demand and bring inflation back toward their target level. In our view this increases the risk of recession in New Zealand as it adds further pressure to already constrained consumers and businesses, at a time where there are signs the economy may be slowing faster than expected, particularly in the construction sector. This adds to broader weakness beginning to appear in New Zealand, like the material decline in dairy prices over recent months as well as a record 8.9% current account deficit.
In other economic data, we got a number of key data points in the US to assess the overall health of the economy:

JOLTS job openings suggest the US labour market is softening, albeit openings remain above pre-covid levels. The number of job openings fell 6% to 9.93m in February, with openings now down a cumulative 12% over the last 2 months. This brings the job openings per unemployed ratio down to 1.67 from 1.86, a key metric the Fed watch to assess the health of the overall employment market. This remains high but is no doubt moving in the right direction.
ADP employment numbers were also softer, with the data outlining 145,000 jobs were added in March versus expectations of 210,000. Hiring strength was most obvious in leisure and hospitality, while manufacturing, finance and professional services cut payrolls.
Finally on US employment, we got non-farm payrolls at the back end of the week which came in at 236k versus expectations of 230k. The composition of jobs gains looks to show that despite a softening in rate sensitive sectors like manufacturing and construction, non-interest rate sensitive sectors like healthcare continue to add enough jobs to keep the market strong. Overall though, the report showed that the market is cooling from very tight levels, albeit at a slow pace.
The other key data point last week was the ISM report, in particular the services print given this had been outperforming other surveys. This disappointed materially, dropping to 51.2 from 55.1, marking one of the lowest readings for the headline composite since the GFC. Many of the key underlying details were much weaker than February, but the standout was the 10.4 point drop in new orders. Overall, this print adds to the view that US economy is slowing and interest rate hikes are biting.
In equity news:

Viva energy announced a $1.15bn acquisition of OTR group, an independent convenience store operator across South Australia. The deal is to be funded via $1bn of debt and working capital, and $150m equity issuance to the sellers. The rationale for Viva looks to be to diversify earnings away from fuel sales, given 70% of OTR earnings are non-fuel.
SEEK hosted their investor day last week, and took the opportunity to provide a trading update. FY23 revenue guidance was revised 1.6% lower to 1.245bn, however reiterated EBITDA and NPAT guidance of $560m and $250m respectively, demonstrating SEEK’s ability to manage costs despite weakening revenue trends. At the investor day, SEEK outlined a long-term revenue target of $2bn and a 50% EBITDA margin by FY28, which implies a 10% revenue and 13% EBITDA growth rate.
New Zealand electricity generator Meridian Energy last week announced they have reached a deal with New Zealand Aluminum Smelter, whereby the smelter will reduce its consumption of electricity at Tiwai Point by up to 50MW. This demand response flexibility is important to give Meridian the flexibility it needs to manage demand at critical points, but is also a key aspect to finalizing a new long-term deal for the smelter to stay.

In the week ahead, we will be watching:

Australian employment numbers for any read throughs for May RBA policy. Additionally, we will pay close to attention to US inflation numbers and the ramifications these may have for the Fed who will next meet in early May.

Thanks for listening, we will see you again next week.

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