RBNZ Eyes 2022 Rate Hike | Fletcher Building

27 May 2021

Global markets were mixed overnight (S&P 500 index +0.2%) eking out a small gain on light trading volume. There seem to be easing concerns that the US Fed would boost rates sooner than expected, however sentiment continues to remain cautious. Optimism around the economy grew further as average daily covid cases fell below 25,000 in the US and as nearly half the US population have received at lease one vaccine dose.

Retail stocks were strong overnight following better-than-expected earnings reports and or upbeat guidance. Amazon was up +0.5% as it confirmed it will buy movie studio MGM for US$8.45 billion.

European markets (Stoxx 600 +0.0%) ended flat, wiping early gains after European Central Bank board member Fabio Panetta said the current uptick in inflation in the Eurozone is too low to warrant scaling back of emergency asset buying. 

Closer to home, The Reserve Bank of NZ kept its OCR unchanged. However, after considering stronger global backdrop, much stronger NZ labour market, easier fiscal policy from last week’s Budget and the higher inflationary pressure that is clearly evident the bank is confident that it will lift rates in 2022. The surprise was the banks transparency to commence lifting rates mid-next year with a goal to lift hike rates by 150bps points over the subsequent 2 years to 1.75% – the level the OCR was at just before the pandemic. Governor Orr added that the OCR track is not concrete/set and would be highly conditional on the economic recovery.  Accordingly this saw NZ interest rates swaps rise and the NZD strengthen.

We have been wary of interest rates moving higher, especially given recent level of inflation. We are cautious that these record low interest rates are not permanent, although the local NZ market experienced a subdued reaction yesterday, likely given recent market pull-back on interest rate hikes earlier this year (which has seen the NZ market underperform other major markets in 2021 so far).

Fletcher Buildings (FBU:NZX / FBU:ASX)

Fletcher Building (FBU) shares jumped +3.1% yesterday after holding their Investor Day presentation upgrading its guidance for the 2021 financial year, forecasting earnings (EBIT) to be between $650m and $665m.

The favourable market conditions meant FBU have a strong balance sheet and will undertake a capital return to shareholders in the form of an on-market buy back of $300m. FBU added that trading conditions remain buoyant with demand for housing resilient, government stimulus targeting infrastructure, and local manufacturers enjoying share gains at the expense of imports.

We continue to remain BUY rated as the near and medium-term outlook continue to look favourable for FBU.

 

Australia & New Zealand Market Movers

The Australian market dipped lower on Wednesday (ASX 200 index -0.3%) in a session marked with losses from e-commerce and mining companies.

The material sector which includes the major miners was the worst performing sector, BHP falling -2.4%, Rio Tinto down -2.2%, and sharp falls for smaller miners losing the previous day's gains.

Like the miners, e-commerce companies which performed well on Tuesday, gave back their gains on Wednesday led by the highly volatile Kogan.com which fell -5.7% to be the biggest loser on the market. 

Tech stocks were the best performer of the day, led by Next DC after receiving another broker upgrade, and the market was attracted to buy the dip in quality Aussie Tech names. 

The New Zealand market was a touch lower yesterday (NZX 50 index -0.1%) dragged down again by market heavyweight Fisher and Paykel Healthcare heading into its result.

Mainfreight shares were up +0.2% following their result as they delivered a strong result which added that trading conditions for the first 7 weeks of 2022 financial year continues to remain strong, hinting towards another solid year ahead. 

Companies sensitive to interest rates had a muted response to the OCR announcement given they've priced in  potential rate hikes earlier, with Mercury NZ (+3.8%) and Contact Energy (+2.4%) surprisingly trading higher. 
 

3 Things Markets will be Watching this Week

  1. Central bank rhetoric globally remains in focus for investors. 
  2. The Latest RBNZ OCR meeting on Wednesday and a raft of US data including new home sales, consumer confidence, 1st quarter GDP, durable goods and pending home sales. 
  3. Across Australasia, earnings releases are due from Aristocrat, Kiwi Property, Mainfreight and Fisher & Paykel Healthcare while James Hardie is scheduled to host an Investor Day on Tuesday.
Global markets were mixed overnight (S&P 500 index +0.2%) eking out a small gain on light trading volume

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