This article originally appeared in The Post
ANALYSIS: It was a strong week for global markets again. The Dow Jones and S&P500 both rose 1.1%, while the Nasdaq Composite gained 1.3%. Europe and Asia were even stronger – the Hang Seng was up nearly 4%.
The big headlines in the US were around another government shutdown, following a funding stand-off. Republicans who hold slim majorities in the House and Senate wanted to pass a stop-gap bill to maintain funding at current levels until late November.
Democrats want any short-term funding to include an extension of enhanced Obamacare tax credits, due to lapse at year’s end.
The shutdown has already had a notable impact for investors, with the monthly jobs report due out Friday not produced after the Bureau of Labor Statistics paused virtually all activity.
In terms of the employment impact of the shutdown, the Congressional Budget Office estimated that about 750,000 employees could be furloughed each day. Government services, such as national parks, passport processing are paused. Essential operations (defence, postal services, debt payments, and air-traffic control) continue. There will be specific economic impacts. It has been forecast that the cost to the travel and tourism industry as a result of government travel being suspended will be around US$1 billion a week.
Markets though don’t seem too perturbed, and perhaps also having seen this movie before. There have been 20 shutdowns since 1976. Investors view them as temporary political gridlock rather than an economic crisis.
When they return, staff that have been furloughed typically get back pay. The overall quarterly GDP impact is expected to be minor, about 0.1–0.2 percentage points per week.
It is noteworthy that shutdowns that have occurred in the past two decades have often coincided with rising equity markets. The shutdown during President Trump’s first term was the longest on record, at 35 days in late 2018/early 2019, yet the S&P 500 rose over 10% during that period. We will have to see how long it all drags on, but it may not prove a big deal for markets.
As a result of the government shutdown, we didn’t have a non-farm payrolls release, but there was some data out on the US services sector, which is also slowing down.
The ISM Services PMI showed that the services sector in the US stalled in September, and is no longer expanding, with a reading of 50%, - the breakeven point for the percentage of firms reporting growth versus those that are contracting. It was the first time in the non-expansion zone since January 2010.
Within the survey, the business activity and production index dropped to 49.9, a decrease of 5.1 points, and the first slip into contraction territory since the early days of the pandemic in May 2020. Employment is still in contraction, but order backlogs rose.
There was, meanwhile, a slightly brighter view provided by a service sector release from S&P Global/Markit. Their survey is a broader one as it includes many small and mid-sized businesses as opposed to the ISM one which focusses on larger firms.
Smaller firms appear to be in good shape. The flavour of the S&P Global survey showed the overall service sector is still in expansion mode, with a read of 54.2 in September, down just slightly from August. It also showed that the sector has now been in expansion for 32 months.
The financial services and tech sectors are going well, although the survey also suggested that consumer-facing services such as leisure and recreation are doing better amid lower interest rates, and the outlook is picking up. Foreign demand improved for the first time in six months. The impact of tariff driven price pressures saw prices charged rise at the slowest rate for five months. Hiring, however, stalled.
So overall the two surveys continue to support the case for another rate cut by the Fed. The minutes from the last Fed meeting are out this week. There is also a reading on US consumer confidence.
Technology stocks were in demand last week. Micron Technology, which produces computer memory and data storage had a very strong week with a 19% gain. The company had a very robust result recently which reinforced its leadership in memory for AI and data-centre workloads.
Pharma giant Eli Lilly jumped 16% on positive news around pharmaceutical policy and drug-pricing developments. The Trump administration struck a deal with Pfizer to reduce drug prices in its Medicaid program in exchange for tariff relief, and indicated similar deals might be extended to other big pharma names including Eli Lilly.
The September quarter earnings season gets underway this week. Constellation Brands, Delta Airlines, PepsiCo and Levi Strauss are amongst the companies reporting.
The ASX200 in Australia had a good week, up 2.3%, as the central bank in Australia left rates on hold. This was not surprising as a recent read showed monthly inflation in Australia reached 3% in August. The market odds of a rate cut by the RBA on Melbourne Cup Day have now lengthened slightly.
The Kiwi market was strong with the NZX50 finishing up 3.1%. Sentiment has been positive ahead of this week’s RBNZ meeting. Property stocks have been particularly in demand. The prospect of lower interest rates is encouraging investors to shift funds from term deposits into relatively defensive, higher-yielding opportunities.
We have the eagerly awaited RBNZ decision this week. A quarter point rate cut to the official cash rate (OCR) is already locked in, and there is also a very real chance that this time they come through with a bigger reduction of half a percent. Recall at the last meeting they cut by 0.25%, but two dissenters were in favour of a larger cut.
Since then we’ve had some dire data, with our economy contracting 0.9% in the June quarter, which was triple what the RBNZ had forecast. More up-to-date statistics have meanwhile shown that our manufacturing sector is back in contraction mode. Even if the September quarter is a much better one for the economy, that is from a very low base. It is clearly tough out there for a lot of people.
We will actually get another snapshot of the economy’s health on Tuesday, with the New Zealand Institute of Economic Research Quarterly Survey of Business Opinion, which the RBNZ is known to follow. Could this possibly be what swings it?
The meeting, of course, will have an additional element in that we have a new Governor announced, but Christian Hawkesby will be in the seat till the start of December. He may be tempted to side more with those that are going to remain after he has gone. There’s also another recent appointee who might also be drawn that way.
We have had significant reductions in the cash rate since last year’s peak of the official cash rate at 5.5% last year, but we arguably need more. At 3% the OCR is still too high, and needs to come back to at least 2.5% at this meeting, and arguably towards 2% by the end of the year.
This will help with the much-needed positive transmission effects to the wider kiwi economy for businesses and also consumers - around 45% of all mortgage holders set to refix their rates in the next 6 months. The big banks cut their fixed one-year mortgage rates to 4.49% last week and also made some cuts at the longer end.