The Month Ahead

August 2022

Equity markets found some support in July, with major benchmarks in New Zealand, the US and Europe on track to finish higher, regaining as much as 5% off recent lows. The mild recovery came as equities traded to levels that looked attractive on a valuation basis, while some easing of oil prices was also a relief for investors.   

Bonds also had a good month, despite rates of inflation holding at multi-decade highs in most developed nations. The yield on the US and New Zealand 10-year government bonds fell by as much as 25 basis points.

August is likely to see further central bank interest rate hikes, while the all-important corporate earnings season continues, with more companies reporting their latest profit numbers. Elsewhere, there’s no shortage of economic data, which will provide further detail on the state of the global economy amid the challenging environment. Breaking all this down is ANZ Investments’ Month Ahead for August.

Reserve Bank of New Zealand primed for another 50 basis point hike

In New Zealand, the focus for August is the Reserve Bank of New Zealand (RBNZ) meeting on 17 August, where it is expected the central bank will deliver its fourth-consecutive 50 basis point hike and its seventh interest rate hike in the post-pandemic tightening cycle. 

Inflation continues to be the main factor in the aggressive tightening, with economic data in July showing the Consumer Price Index (CPI) hit 7.3%, driven largely by housing-related items, including construction and rents. 

However, after an aggressive six months of tightening, the economy is starting to show signs of slowing, which has been evident in recent consumer and business confidence data. These reports have shown that general optimism is waning as inflation and labour constraints continue to worsen. Given the deteriorating outlook for the domestic economy, we could see a more cautious tone from the RBNZ. 

Despite this, a recent spanner in the works has been criticism of the central bank’s performance during the pandemic, with many arguing the interest rate cuts and bond purchases – at least the extent of them – contributed to the rapid rise in inflation. And with the central bank set to review its policy during the pandemic, and the National Party calling for a formal review, it could mean the aggressive tightening path is set to continue with its credibility being questioned. 

Elsewhere, the Reserve Bank of Australia and Bank of England are also expected to raise policy rates in August as they attempt to rein in inflation.

Earnings: Retail giants will reveal the health of the underlying economy

August will see earnings season continue with more companies set to report. While many of the household names (Amazon, Google, Apple and Meta – the parent company of Facebook) reported in July, August will see high-profile bricks-and-mortar companies report, which will tell us more about the state of the global economy. 

Some notable companies include Target, Walmart, Home Depot and Lowe’s, with the first two recently issuing profit warnings, saying rising fuel and food costs have weighed on consumer spending. In the current environment, these companies can be bellwethers for assessing the health of the underlying economy, with consumer spending making up two-thirds of the US economy. Therefore, should we see disappointing results from these retail giants, it could heighten concerns that the post-pandemic growth recovery is slowing.

Domestic and global economic data to watch

August will see a slew of economic data both home and abroad. Domestically, the New Zealand labour report is released on 3 August, where it is expected the unemployment rate will remain near its record low of 3.2%, while later in the month, retail sales data will reveal just how well New Zealand consumers are holding up as rising mortgage rates and other costs are eating into paychecks. 

Overseas, inflation data will again be front and centre with all eyes on the US CPI report due 10 August, which is expected to show prices are running at an annual pace of around 9%. However, perhaps more importantly will be the core Personal Consumption Expenditures (PCE) price index data released on 26 August. The core PCE is the US Federal Reserve’s preferred inflation measure as it strips out volatile food and energy prices. Since peaking at 5.3% in February, the core PCE has drifted steadily lower, and should this trend continue, it will provide some comfort to policymakers in that the tightening of monetary policy is easing pricing pressures. 

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This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 1 August, 2022 and is subject to change.

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