Markets Adjust for Central Bank Moves | Pacific Edge 

20 January 2023

New Zealand Market Movers 

The New Zealand market (NZX 50 Index, -0.3%) took the shock resignation of Prime Minister Jacinda Ardern in its stride on Thursday. The fact that this is an election year with a high probability of a change in government contributed to its muted impact on the market. 

 A2 Milk (-2%) dragged down the market as investors react to China declining birth rate. 

Elsewhere, Smartpay (+3.2%) announced revenue growth of +85% in the three months to December 31, and Michael Hill announced its results for first half 2023 financial year, with its NZ segment revenue up by +14%.  

NZ food price inflation rose to a 32-year high docking a +11.3% year-on-year increased, solidifying a chance of another high inflation print for the December quarter. 

Research from CBRE, showed the more desirable industrial property sector is showing signs of weakness, as slowing rental growth, saw the gradual increase in cap rates (a fall in asset value) over the year accelerate in in the December quarter. 

Australia Market Movers 

The Australian market (ASX 200 Index, +0.6%) swung into positive territory on Thursday after a weaker-than-expected jobs report cut market expectations on the pace of future interest rate hikes.  

Australia shed 14,600 jobs in December, well below expectations for a gain of 22,500 jobs. The yield on 10-year government bonds plunged 23-basis-points, while the yield on 1-year government bonds fell 20-basis-points. 

Europe Market Movers  

European markets (Stoxx 600 Index, -1.6%) cratered on Thursday with tech stocks (-2.9%) leading losses as all sectors finished in the red. 

ECB President Lagarde reiterated that “Inflation by all accounts, whichever way you look at it, is way too high…we shall stay the course until such time that we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner”. 

US Market Movers 

US markets (S&P 500 Index -0.7%) ran choppy — bears nor bulls were satisfied as American markets digested two sets of data.  

The first: house building permits and house sales are down: multifamily home sales fell 18.9% from November as investors scrambled to exit REIT-like private equity structures that own a lot of these multifamily units. Home building permits fell 1.6%, down to their lowest level since May 2020. This data is cautiously optimistic – tightening does seem to be working. However, single-family home sales actually increased 11.3% (how many of those multifamily sector bets were rolled over to single family housing?) 

Ditto unemployment: initial jobless claims fell (190k vs. expectations of 214k), but continuing claims grew from 1.63M to 1.65M. This data feels too granular to evoke a big reaction. 

More mixed data out of Proctor and Gamble’s earnings. The company upgraded its earnings (+2/3%) forecast to run roughly flat YoY (vs. a downgrade last year where it said sales would likely be down 3% for ‘23). Not so fast, though – total sales volume for the quarter fell 6% YoY whilst the company increased prices 10%. This answers a question we have been asking since two quarters ago — how much pricing elasticity is too much? The answer here is clarifying: a seller of consumer basics, like P&G, can increase prices by 10% yet a 6% drop in total volume is a clear sign of consumer fatigue. 

Stock in Focus: Pacific Edge (PEB.NZX) 

Pacific Edge shares fell -3.9% despite revealing its test volumes of 7,768 had increased by +36% year on year in the three months to December 2022. 

While a positive update, investors remain focused on Novitas Local Coverage Determination (LCD) insurance coverage, which is still the major uncertainty overhanging the shares. A decision is still yet to be officially made – but for now Pacific Edge are still being reimbursed for their tests and have not seen any reduction in demand, with management expecting a decision needs to be made by July 2023.  
We like the growth potential of Pacific Edge, however the potential loss of the Novitas Coverage would stall the growth trajectory and impact revenue adversely. We are BUY rated on the long-term with a high-risk caveat, with medium-term downside assuming Novitas Coverage is cut, which appears a slight but distinct possibility.    

 
What Markets will be Watching this Week (UTC +13) 

Monday 
NZ Westpac Consumer Confidence DEC 

Tuesday 
NZ Balance of Trade NOV  

NZ ANZ Business Confidence DEC 

AU RBA Minutes of Dec Policy Meeting 

Wednesday 
EU Consumer Confidence DEC 

NZ ANZ Consumer Confidence DEC 

Thursday 
GB GDP Growth Rate YoY Final Q3 

Friday 
US Chicago Fed National Activity Index NOV 

Saturday 
US Durable Goods Orders MoM NOV 

The New Zealand market (NZX 50 Index, -0.3%) took the shock resignation of Prime Minister Jacinda Ardern in its stride on Thursday. The fact that this is an election year with a high probability of a change in government contributed to its muted impact on the market. 

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