As part of the new coalition Government’s 100-day plan, the Reserve Bank of New Zealand is to return to a sole focus of maintaining price stability.  This is a welcome development.  While labour market outcomes will always be important for the Bank, they don’t have the tools to influence the complex interplay of factors, including fiscal policies, labour market dynamics, and broader structural issues that affect labour market outcomes.

One year ago, we released an Insight report entitled “The Bonds are Dead, Long Live the Bonds!” We cautioned investors against remaining bound to global bond benchmarks, given the risk of fiscal deterioration set against a still-elevated inflation picture. Since then, broad bond indices have weakened while more specialised fixed-income exposures have held up well despite higher yields

​The negatives for the New Zealand economy are continuing to build, meaning the weakest point in the cycle is still ahead of us.  The good news is that inflation is moderating, though domestic inflation pressures are proving stickier and more difficult to get under control.  We continue to believe the RBNZ has done enough tightening and now just needs to be patient, but we don’t expect interest rate cuts until this time next year.

The long end of the US yield curve is currently selling off at a time when conventional wisdom suggests it should be rallying, while the yield curve should be becoming more inverted.  So, what's going on? And what are the implications for investors?

Technological change is not a new thing, but it does seem to be coming at us faster and faster.  The latest technological change evolution is occurring in Artificial Intelligence as ChatGPT ushers in a new era of generative AI.  This note looks at the economic implications of AI, as well as the opportunities and risks for investors.”

• This is the first edition of what will be a regular quarterly publication focussed on the New Zealand economy.  Highlights this quarter:

• Downside factors still dominate the New Zealand growth outlook over 2023.  We expect annual growth to bottom out at -1.0% in the third quarter of this year.

• Net migration is surging higher.  This will lead to higher aggregate demand in the economy, but also help take the pressure off wages.

• The housing market appears to be stabilising in the middle of 2023.  Overall, we see a peak to trough decline of around 18%.

• The unemployment rate is expected to move higher over the next few months.  We see this peaking at 5%.

• Headline inflation is moving lower, though core measures remain sticky.

• The RBNZ has pushed pause on the rate hiking cycle.  We concur, but don’t expect interest rate cuts until the second half of next year.

China’s role as a source of global disinflation is drawing to a close. Unless it can unlock the answer to higher productivity that has thus far eluded most more developed economies, China seems destined to become a new source of global inflation. 

In an inflation-prone period, when rising central bank policy interest rates have finally pushed up the offered rates for term deposits, what are the advantages of investing in an income-oriented managed fund?

The world is battling its most significant inflation outbreak since the 1970’s. Having missed the opportunity to get

in front of the problem, many developed world central banks are now tightening monetary policy aggressively.

Bevan Graham discusses the recent flattening of the US yield curve and looks at what similar periods in history suggest happens next, and when.  While the warning signs shouldn’t be ignored,  it’s too early to be worried about recession and too early to de-risk portfolios.

Central bank credibility has taken a bit of a knock as the transitory inflation narrative has been proven wrong.

Salt Economist Bevan Graham argues that in months and years to come, as we look back at the history of the upcoming interest rate hiking cycle, we will likely reflect that the September 2021 meeting of the FOMC was the pivotal moment.  Bond yields are now in the next phase of their upward trajectory as the FOMC has become more realistic about the inflation outlook.

US fiscal debates are always fraught and have real consequences – in 2011 the debt ceiling impasse led to a US sovereign credit rating downgrade.  In this Salt Insights, Economist Bevan Graham looks at the current fiscal standoff.

Bevan Graham muses on the latest Covid lockdown, the economic outlook and what it means for the RBNZ.

Inflation and its structural forces: The big debate of 2021 has been the extent to which recently higher inflation would prove transitory or whether we were in for a period of more sustained inflation requiring a monetary policy response. 

Bevan Graham and Sonya Fynmore discuss the increasingly urgent need for action on climate change and the important role fund managers have to play in supporting the necessary transitions to a more sustainable future.

Salt Economist Bevan Graham takes a look at some of the recent activity data out of China.  The Chinese economy is recording spectacular growth rates off the low base of last year.  That said, challenges remain as the leaderships seeks to reorient the economy towards greater consumption to create a more prosperous society.

Higher economic growth is critical for increased prosperity.  To be more precise, per capita GDP growth is more important than total GDP.  Turning the dial on per capita GDP growth requires a multifaced approach across innovation, education, global integration, and sustainable development that harnesses our strengths while addressing our vulnerabilities.  This note looks at the key areas government needs to focus on to achieve greater prosperity.  Progress towards a more prosperous future will be slow and incremental.  That means a well-articulated plan is essential to bring everyone along on the ride.

The impending September Monetary Policy Meeting of the Bank of Japan (BoJ) last week had markets braced for a further tweak to policy settings.  In the end the statement was at the dovish end of expectations.  However, in the press conference, Governor Kazuo Ueda declined to push back on market speculation, following his prior comments, that further normalisation of policy may not be too far away.  This note looks at the implications of that eventuality for markets and investors.

Markets are fretting about China again.  Activity indicators have been softer than expected recently but the good news is the policymakers are responding.  However, much of what ails China is structural, especially its huge appetite for debt.  There are options for addressing that, with the only real question being whether its orderly or disorderly.  At the same time, the authorities are leading China through an intended structural shift from exports and investment to common prosperity and self-sufficiency.  As we think about all these moving parts, we must remember to think about China in a different way to how we might think about a more free-market economy.  That leads us to the conclusion that the biggest risk, for China and investors, is a policy mistake.

The position of the US dollar as the world's reserve currency is an issue that pops up from time to time.  While the sheen has come off the Greenback in recent years, there is no real alternative.  Ultimately, it's all relative.  If the USD is to lose its influence as a reserve currency, something must rise in influence to take its place and we are a long way from that being the case.  Furthermore, such a change will be driven by structural forces that will take many decades to unfold.  We are not going to wake up to headlines one day that the era of US dollar dominance is over.

Relief at legislation passing through the US Congress to suspend the debt ceiling for two years belies the bigger issue of US long-term fiscal sustainability.  Indeed, many countries are now facing into increasing calls for new spending and/or tax relief while public debt is already on an unsustainable upward trajectory.  Even here in New Zealand, where our current debt position is more favourable than many, the challenges are just as great and will require our politicians to make some hard calls sooner rather than later.

Developed country central banks are close to pausing rate hikes.  If they’ve got it right, this pause should also be the peak.  However, we urge caution in expecting rate cuts to follow quickly.  Central banks will only move to cut interest rates once the broadest set of macro-economic conditions is consistent with lower inflation not only being achieved, but also sustained.  This may take longer than markets are currently anticipating.

In an inflation-prone period, when rising central bank policy interest rates have finally pushed up the offered rates for term deposits, what are the advantages of investing in an income-oriented managed fund?

The economic case for an allocation to global listed infrastructure is becoming increasingly well understood.  We have had to think long and hard about the sustainability aspects of climate change and decarbonisation, in particular whether to exclude certain firms from the portfolio or engage with them to influence meaningful change.  

Bevan Graham discusses latest New Zealand confidence indicators and muses on the extent to which the current weakness is due to temporary or longer lasting factors.  At the same time, inflation indicators continued to march higher, reinforcing our view that there is simply no justification for stimulatory monetary conditions right now.

The war in Ukraine will have still uncertain but ultimately far-reaching implications for trade, growth and inflation, well beyond the immediate impact on commodity prices.

The 26th Conference of the Parties (COP26) in Glasgow ended with what is best described as incremental progress on new net zero targets, and a request for countries to strengthen their 2030 targets by the end of 2022. Economist Bevan Graham discusses what this means for firms, the economy and portfolios.

New Zealand investors often believe that Listed Real Estate is an asset class they know fairly well. Our domestic capital markets’ history is dotted with property securities of various breeds and formats.

This Salt Insights paper looks at China’s recent regulatory interventions, putting them in the context of the country’s economic development history and its current economic challenges.  We also discuss the risks including our greatest concern that these regulatory interventions, while possibly well-intentioned at achieving common prosperity, may do more damage to aggregate prosperity.

The Appeal of the Real: is Listed Infrastructure an inflation vaccine? 

Confronted with unexpected and potentially persistent inflation for the first time in years, investors are being advised to diversify into real assets.

Geo-Political Risks: what to watch and the importance of active management.

As we look to the future and try to determine the outlook for economies and markets, we keep a keen eye on political developments. 

Income Investment Funds: Taking up the strain? 

Income is a problem in New Zealand, and not just in the sense of investment income.