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Newsroom.co.nz

Business

Andrew Patterson

Markets churn on interest rate signals

Mainfreight United States Moody Don Braid Inflation

Sharemarket rally stalls as Mainfreight result highlights tighter conditions

Markets failed to follow through on the previous week’s strong rally, suggesting investors remain nervous about the long term impact of elevated interest rates on earnings and wary that central banks may still have more work to do to control inflation.

The NZX50 ended the week up just 0.2 percent at 11,140 after gaining more than 3 percent the previous week, while across the Tasman, Australia’s ASX200 closed out the week virtually unchanged after the RBA lifted its cash rate by 25bp to a 12-year high of 4.35%.

Meanwhile, Mainfreight’s half year result was a sobering reminder of how much has changed in the past 18 months when shipping rates had climbed to record levels and the company was scrambling to find additional warehouse space for customers as well as facing significant demand for its freight services.

With the global economy beginning to slow and shipping giants such as Maersk warning of cuts to services, the outlook is now looking far less rosy.

While the freight, transport and logistics group’s performance for the six months to September fared slightly better than the market had expected, managing director Don Braid said a combination of a downturn in freight demand and reduced air and ocean shipping rates had impacted its bottom line result.

Mainfreight reported its air and ocean division recorded a 54 percent hit to pre-tax profits at $74.2m, with revenue declining 43 percent to $874.1m. Sea freight volumes fell 16.9 percent for the half-year, while transport volumes declined 3.5 percent. Air freight was the only division to show a slight lift rising by 2.7 percent.

Braid said the most significant decline was in its Americas division, with a profit contribution reduction of almost 80 percent to US$12m largely due to air and ocean freight declines on its important trans-Pacific eastbound trade from China.

However, one aspect of Mainfreight’s balance sheet that counts in its favour is its very low debt levels, an issue investors will increasingly focus on in this month’s reporting season.

Catch-22 situation creates dilemma for central banks

As markets continue to churn based on the latest utterances about the likely pathway for interest rates, analysts and fund managers are increasingly pointing to what they describe as an endless “feedback-loop” as reactions to comments from central bankers speculating on future interest rate moves make it more complicated for those policymakers in their battle with inflation.

In recent months central bankers have signalled that the series of aggressive interest rate rises to curb price pressures may shortly be over. That would bring an end to policies that have seen benchmark lending rates both here and in the US/Europe hit their highest levels in more than a decade.

But as the cycle of rate rises draws to a close, policymakers are finding that firmer guidance for the market is creating a ‘Catch 22’ situation. Any indication that rates will start falling triggers a rally in bond prices, pushing yields lower. This results in borrowing costs falling, which in turn can ease the tight financial conditions that central bankers have been trying to create in order to bring inflation back to target. The resulting outcome puts the onus back on policymakers to consider extended higher rates, analysts say.

Markets now find themselves in “an endless loop where everyone is frustrated”, Dario Perkins, head of global macro at research firm TS Lombard recently told the Financial Times.

“I guess we just bump around until we get some clarity on whether it’s a hard or soft landing for the US economy,” he said.

Adding to investor concerns, rating agency Moody’s has lowered its outlook on the US’s credit rating to “negative” from “stable”, pointing to a sharp rise in debt servicing costs and “entrenched political polarisation”.

In an update released on Friday, the agency said the change to its outlook reflected increasing downside risks to the US’s fiscal strength, which “may no longer be fully offset by the sovereign’s unique credit strengths”. Moody’s added that the drastic rise in Treasury yields this year “has increased pre-existing pressure on US debt affordability” given that its debt serving cost now exceeds US$1 trillion annually.

It added that “in the absence of policy action, it expects the US’s debt affordability to decline further, steadily and significantly, to very weak levels compared to other highly rated sovereigns”.

Also weighing on investor sentiment, the short-term deal struck last month to avert a US government shutdown will expire next week unless a new agreement is reached in coming days. A deal to avoid shutting down some operations and furloughing non-essential workers remained inconclusive on Friday.

A change in a rating agency’s outlook can, but does not always, precede a downgrade in a credit rating. Moody’s on Friday reaffirmed the US’s triple A rating, reflecting the agency’s view “that the US’s formidable credit strengths continue to preserve the sovereign’s credit profile.”

Moody’s is the only one of the three big credit rating agencies that still awards the US a pristine triple-A credit designation.

Even millionaires admit they’re finding the going tough

Feeling “rich” is becoming increasingly elusive, even it seems among millionaires, where just 8 percent would characterise themselves as ‘wealthy’ these days.

Surprisingly, around 60 percent of those with $1 million or more of investable assets said they are more likely to consider themselves upper middle class, according to a recent survey of 3,000 adults in the US by financial planners Ameriprise Financial.

To that point, 31 percent consider themselves decidedly ‘middle class’.

Between persistent inflation, high interest rates and geopolitical and economic uncertainty, fewer Americans, including millionaires, feel confident about their financial standing.

“Many people feel squeezed between higher prices and lower asset prices,” Kim Maez, a private wealth advisor at Ameriprise told business news network CNBC.

“While a necessary part of the economic cycle, it’s also uncomfortable.”

Even doctors, lawyers and other highly paid professionals — also referred to as the “regular rich” — who benefit from stable jobs, homeownership and a well-padded retirement savings account, said they don’t feel well off at all. Some even said they feel poor, according to a separate survey conducted by Bloomberg.

Of those making more than $175,000 a year, or roughly the top 10 percent of tax filers, approximately one-quarter said they were either “very poor,” “poor” or “getting by but things are tight.”

Coming up this week…

Monday