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Brendan Larsen
Good morning, its Monday 8th May and I’m Brendan from Milford Asset Management.

Last week was one of the busiest weeks for economic releases this year, leaving investors with plenty to digest.

It began with the Reserve Bank of Australia on Tuesday, where they surprised the market by hiking the cash rate by 25bp to 3.85% after pausing at the prior meeting to assess the lagged effects of monetary policy. Markets were essentially pricing no chance of a hike after marginally softer CPI data and comments at the last meeting, so this hike caused a material move in rates and currency markets. The RBA referred to the strength in services inflation and the pick up in wages growth as key reasons for the hike, given the upside risks seen overseas.
Continuing with central banks, the key meeting of the week was Federal Reserve on Thursday morning. As widely expected, the committee raised rates by 25bp to a range of 5-5.25% and removed guidance that further tightening may be appropriate. The Fed noted that further rate decisions will be determined meeting by meeting based on incoming data, and chair powell noted that we may indeed be at peak rates. Despite this shift in stance, Chair Powell has made it clear that the committee intends to keep rates elevated for a prolonged period to bring inflation back down to the 2% level. Interest rate markets are currently pricing 3 rate cuts by the back end of the year, suggesting the rates market is worried about a more material economic deterioration and thus more cuts are warranted.
Given the aforementioned data dependency by the fed, Fridays Non-farm payrolls report was closely watched by the market. This topped expectations again, increasing by 253k versus consensus at 185k. There were meaningful downward revisions to the prior 2 months, which means that over the last 3 months payrolls job growth has averaged 222k. This does suggest some gradual moderation, but jobs growth remains high by historic standards. Despite this suggesting the fed may have more work to do, markets flipped back to a good news means good news mode, and the market rallied ~2%.
The other key central bank meeting last week was the ECB, who slowed the pace of hikes to 25bps but signaled more to come. Inflation across Europe remains stubbornly high, hence when pressed on whether the bank would continue to hike despite having raised rates by the most in its 25 year history, president lagarde noted that the bank is not pausing and that more ground needs to be covered. Interest rate markets are pricing 2 more hikes in Europe this year, which is now a notable divergence to US Federal Reserve pricing, where cuts are being priced.
In New Zealand we got a read on the state of the labour market, which as expected remains very tight. Employment growth accelerated, rising 0.8% q/q, ahead of the RBNZ forecast of 0.2% q/q. The unemployment rate was unchanged at 3.4%, while the participation rate increased to a record high of 72%. Wages growth continues to be strong but somewhat mixed, with private sector labour costs increasing 4.5% y/y, a touch below the RBNZ at 4.7% y/y, however average hourly earnings increased 8.2% y/y vs RBNZ expectations of 7.6% y/y. All up, the data shows employment in new Zealand remains beyond the maximum sustainable level, and does little to change the banks hawkish rhetoric.
In equity news,

US regional banks continue to come under pressure, with the regional bank index falling as much as 16% by Thursday before rallying back 6% on Friday. Early in the week, news surfaced that JPMorgan had reached a deal to buy First Republic bank, and CEO Jamie Dimon noted that the end of the banking crisis was near. Despite this, market participants weren’t happy, with some pointing to the fact that the FDIC did not announce changes to deposit insurance alongside the First Republic receivership process. This saw PacWest and western alliance shares fall 28% and 15% respectively, triggering multiple volatility halts. Many Wall Street analysts now think the stocks are far detached from fundamentals, which caused even more volatility in Friday trading, with PacWest shares soaring as much as 88%, the biggest intraday gain ever. PacWest finished the week down 36%, while Western Alliance finished down 25%.
ASX listed retailer JB HI-FI provided a better than expected Q3 update, with stronger sales suggesting share gains. Sales for the third quarter fell 0.1% on a same store basis, while in New Zealand, sales in march were up 10.8%. The Good Guys chain fell 3.8%. The results show that sales growth has started to moderate from high levels, but so far are better than feared.
National Australia Bank disappointed the market last week, missing consensus by 2% at the earnings line. The big miss was at the net interest margin line, which came in well below expectations at 1.77% vs consensus at 1.83%. Importantly, second quarter net interest margin of 1.75% was 4bps lower than first quarter, and below FY24 forecasts of 1.8%. NAB CEO Ross McEwan called out the competitiveness of the Australian mortgage market and how that is weighing on margins across the key banks.
Miner Silver Lake Resources revealed on Thursday that it had put forward a bid to St Barbara to acquire its Gwalia gold mine at a premium to rival bidder Genesis, 11 days after St Barbara had agreed terms with Genesis. The Silver Lake deal totals $732m, which consists of $326m in cash and 327.1m new silver lake shares. Despite the total package being bigger than the $640m bid by genesis, the st Barbara board refused to engage with silver lake, despite major shareholders encouraging the company to do so.
In the week ahead, we will be watching the Bank of England, where they are expected to hike rates by 25bp given the recent reacceleration in inflation. We will also be watching US CPI given the implications for interest rate policy, as well as NZ migration to assess whether recent strength has continued.

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

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