The Month Ahead
July 2023
After a quiet May, several global equity markets resumed their move higher in June. They were, buoyed by ongoing declines in rates of inflation, raising hopes that the global economy can navigate current challenges and avoid a sharp slowdown. In June, the S&P 500 Index reached its highest level in more than a year, while the NASDAQ 100 Index continued its stellar performance, and was on track for its fourth successive month of gains, helped in part by ongoing strength from the mega-cap companies.
Closer to home, the NZX 50 Index continued its underperformance as economic data showed the country entered a technical recession earlier in the year.
With central banks still front and centre it makes July a busy month, with a plethora of central bank meetings. Breaking down what we expect from several of these meetings is ANZ Investments’ Month Ahead.
Transcript: The Month Ahead – July 2023
[Video: Question and answer session with Craig Tyson, ANZ’s Head of Australasian Property Securities, New Zealand.]
Question: Why has property struggled over the past 12 months?
Craig Tyson: Yes, it’s been a tough period for property. We came out of COVID with an inflation problem and what we saw was central banks around the world raising rates to get in to tackle that inflation problem. In fact, our Reserve Bank was one of the first to start raising rates. And, our rates have risen by over 5%. So what that did is put a real pressure on both the housing market and the commercial property market. In the commercial market we saw interest ratings rising at a faster rate than rents. And so that had an impact to the performance of the commercial market. And in the housing market we saw mortgage rates rise from the lows of sort of around 2% to today, where they are closer to 7%. And that’s had a big impact on the demand, certainly from first home buyers but pretty much all aspects of the housing market. And so property really has been on its heels the last 12 months.
Question: How has the Work from Home phenomenon affected property?
Craig Tyson: Yes, well clearly it’s had a huge impact on office property.
Working from home has obviously had an impact on the utilisation of office and we’ve seen utilisation rates fall to below 50% so only you know, 50% full. Office landlords have obviously been impacted. And there’s two schools of thought about working from home. There’s people who think office has been affected for the long term and will never recover. And then there’s the school of thought which we kind of believe in which is that people will return to the office on average probably about four days a week.
Most corporates that we speak to are desperate to get their employees back into the office. Why? Because people work better face to face. There’s that dynamism, that energy and that spontaneity that you just don’t have when you’re in a Zoom meeting or a Teams meeting.
Question: There are signs residential property prices are near the bottom. What does this mean for the property sector?
Craig Tyson: It certainly feels like we’ve turned the corner. The Reserve Bank indicated at their last meeting that when they took interest rates to 5.5% that they’d probably done enough to get inflation under control. And, we certainly think that there’s a good chance we’ll see interest rate cuts next year. Some economic forecasters are saying, perhaps later this year we’ll see some rate cuts. So we are hopeful that once you see those rate cuts come through, we’ll see mortgage rates start to fall and that confidence will get come back into the market. We’ll see that firstly through the days to sell coming down, which is elevated at the moment. And then secondly, we’ll start to see the turn over improve. Those are the real signs that we’re looking for to see that confidence back in the market.
Question: After a challenging period, what is the outlook for property?
Craig Tyson: Well, it really depends on the economy and we have an election later this year. There’s a lot of other uncertainty out there in the global economy and all of those things impact the property sector in general. We’re confident that the worst is behind us. As I’ve talked about there’s going to be some interest rates cuts, hopefully next year, that will certainly help. But it’s going to be a long, slow process, I think, of healing, over the next sort of, one to two years.
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Published 22 June 2023. Information can change, is general, and not advice.
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Past performance is not indicative of future performance. We don’t guarantee performance, which depends on many things, and could be positive or negative.
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The Fed is expected to resume interest rate hikes
After hitting the pause button in June, the US Federal Reserve (the Fed) is widely tipped to resume its interest rate hiking cycle, as inflation, while trending much lower, remains above its 2% target. The pause in June was largely to buy itself some time – monetary policy operates with a lag and the pause would allow the central bank to collect more economic data. “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy”, it said.
Reinforcing the likelihood of another 25 basis point hike is that economic data since June’s pause has been on the stronger side; housing data was on the strong side, with the number of new homes being built rising 21.7% from the month prior, consumer sentiment data improved and retail sales rebounded. As at 25 June, interest rate markets are pricing in about a 75% chance of a 25 basis point hike, which would take the fed funds rate to 5.50%. The Fed meeting takes place on 26 July.
RBNZ to pause amid slowing economy; inflation data the focus
In New Zealand, the Reserve Bank of New Zealand (RBNZ) is expected to leave the Official Cash Rate (OCR) unchanged at 5.50%. At its May meeting, the Committee made it clear that 5.50% would be the terminal rate – the rate where the OCR would peak.
And since the May meeting, economic data has only confirmed that it is time for the RBNZ to hit pause. Primarily, it was the news that the economy entered a technical recession earlier this year when GDP fell 0.1% in the first quarter, following a 0.7% decline in the final quarter of 2022. A technical recession is defined by two consecutive quarterly declines in growth.
Although the interest rate decision appears to be a foregone conclusion, some economic data in July will garner our attention, notably inflation, where it is expected the annual pace of inflation will have dropped to about 6% for the second quarter, down from 6.7% in the quarter prior. With the economy in a recession and consumer demand waning (retail sales figures continue to underwhelm), it would take a significantly higher inflation print to bring interest rate hikes back to the table.
RBA to remain hawkish – but an interest rate hike is a close call
On 4 July, the Reserve Bank of Australia (RBA) meets where a decision whether or not to lift its key interest rate is up in the air. The RBA has been somewhat more patient with its monetary policy tightening compared to many of its global counterparts, having started its policy tightening later (May 2022), lifted interest rates in smaller increments (no 75 basis point hikes), and including a pause in April this year.
However, its decision-making board is facing conflicting issues, evident in the minutes of the June meeting, where it said the decision to raise interest rates was “finely balanced”. On one hand, the labour market remains red hot, with the economy adding more than 75,000 jobs in May, while the unemployment rate edged lower to 3.6% and the participation rate climbed to an all-time high.
On the other hand, the RBA remains attuned to the impact of the cumulative interest rate hikes and the fact monetary policy acts with a lag. “In taking the decision to increase interest rates again, members acknowledged the considerable uncertainty regarding the outlook for household spending and the financial stresses facing some households”, the minutes showed.
As at 26 June, interest rate markets are pricing in about a 40% chance of a 25 basis point hike. Hike or not, the board is likely to remain hawkish given elevated inflation and a resilient employment market.
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Important information
This information is issued by ANZ Bank New Zealand Limited (ANZ). The information is current as at 29 June 2023, and is subject to change.
This document is for information purposes only and is not to be construed as advice. Although all the information in this document is obtained in good faith from sources believed to be reliable, no representation of warranty, express or implied is made as to its accuracy, completeness or suitability for your intended use. To the extent permitted by law, ANZ does not accept any responsibility or liability for any direct or indirect loss or damage arising from your use of this information.
Past performance is not indicative of future performance. The actual performance any given investor realises will depend on many things, is not guaranteed and may be negative as well as positive.