If the country is to begin ‘futureproofing’ itself against more frequent climate change related flooding, the rebuild cost will rise dramatically – and that's worrying for Governor Adrian Orr. Andrew Patterson reports.
As the Reserve Bank prepares to deliver its first monetary policy statement of the year this week, the backdrop to the decision has changed dramatically in the wake of the devastating impact of Cyclone Gabrielle and the recent flooding in Auckland; something no one could have predicted at the time it delivered its last pronouncement on the NZ economy in December.
Back then, a further 75bp hike seemed almost a certainty as data continued to show inflation had barely begun to slow despite multiple rate hikes by a central bank determined to bring it back within its target range.
Fast forward six weeks and there are growing calls from some economists, including Kiwibank’s Jarrod Kerr, for the central bank to consider pausing on further rate hikes altogether.
READ MORE: * Shock and Orr: Rate hikes kill off housing affordability * Skyline chair bucks market downturn with hefty house sale
“A pause from the Reserve Bank this week would be welcomed and highlight that officials are cognisant of the economic damage being inflicted," Kerr wrote in the bank's weekly economic update.
"The forward guidance from the Reserve Bank could point to a resumption of rate hikes from April, if required. Although the path for interest rates is likely to be much lower than the aggressive path to 5.5% outlined last November. It’s out of date."
Not since the Christchurch earthquake in 2011 has the country faced devastation on such a scale. Early estimates of damage already run into the tens of billions, though these figures are likely based on replacement costs to repair damaged roads, bridges and critical stormwater infrastructure.
If the country is to begin ‘futureproofing’ itself in the face of escalating bills resulting from more frequent climate change related flooding events, the total will rise dramatically.
The timing of this national disaster couldn’t have been any worse for an economy already facing severe capacity constraints, including critical labour shortages, dwindling building supplies and escalating costs.
Suddenly the Reserve Bank’s problems have magnified significantly as it attempts to balance inflation that is barely slowing, a hot labour market characterised by severe labour shortages and the risk that further rate hikes usher in a recession. And now devastation in one of the country’s most important horticulture regions on a scale few could have ever imagined have now complicated things even further.
Not that the sharemarket seemed particularly bothered by the events of the last few weeks.
Despite the country being placed in only its third national emergency ever, the NZX50 finished the week down just 0.3 percent, though stocks directly impacted by the flooding in the Hawke's Bay were sold off sharply. Horticulture exporter Scales Corp saw its shares plunge almost 20 percent, while Port of Napier shares slumped 10 percent.
Watch for Reserve Bank governor Adrian Orr to carefully walk a tightrope this Wednesday offering support for those regions caught up in the aftermath of the flooding while pointing out that the impact of the disaster will drive prices higher only adding to his inflationary dilemma. A 50bp hike rather than the 75bp increase that had previously been foreshadowed now seems more likely.
Earnings season delivers a mixed bag of results
Fletcher Building brought forward the release of its half year results by two days reporting a sizeable drop in profit and repeated its earlier warning that its full year result would be hit by the recent upper North Island floods.
Net profit for the six months to the end of December almost halved at $92m verse $171m previously despite revenue increasing 5 percent to $4.28b.
The company forecast full year pre-tax earnings of $800m to $855m
Fletcher’s said its interim bottom line had been hit by significant costs ($150 million) relating to Auckland's International Convention Centre, which is being rebuilt after a major fire.
Fletcher Building shares slid 7 percent for the week in the wake of the announcement, their biggest weekly fall since September after more than 12 million of its shares were traded last week.
Ryman calls on shareholders to reduce elevated debt levels
Retirement village operator Ryman Healthcare finally faced up to the reality of its debt situation last week announcing plans to raise $902 million from shareholders to reduce debt and fund future developments.
Shareholders will be offered the opportunity to purchase one new share for every 2.8 currently held at $5 each, a 20 discount on its last traded price of $6.40.
Chief executive Richard Umbers said the company needed to reinforce its balance sheet and in particular to reduce its debt levels in the wake of rising interest rates.
"Our significant recent investment in our portfolio underpins our potential for future growth but has resulted in higher debt than we are comfortable with in current market conditions," Umbers said.
Ryman has 45 retirement villages in New Zealand and Australia catering for about 13,000 residents, with 15 villages under construction, but has been borrowing to acquire sites for future villages and fund its expansion in Australia.
Its debt level has risen to 45.3 percent of the value of its equity, which it planned to reduce to around 34 percent.
Ryman shares were placed in a trading halt following the announcement and are expected to resume trading today.
Since peaking at $17.20 in January 2020, the shares have since fallen more than 60 percent in value as higher debt servicing costs and falling property values have severely eroded its long term outlook.
My Food Bag shares plunge 30 percent to new all-time low
There was no reprieve for shareholders in My Food Bag who were dealt yet another blow after the high profile meal-kit provider reported slumping revenues and announced that it would no longer be paying a dividend.
Since listing in March last year My Food Bag shares have plunged more than 85 percent closing on Friday at a new low of just 27c, compared to the $1.85 price the shares were sold at ahead of its listing.
With little prospect of a turnaround anytime soon in the wake of falling margins, increased competition and a fickle customer base looking to cut costs as the cost of living continues to surge, the outlook for the business is looking increasingly dire.
Ironically, the company was forced to admit that with fewer customers signing up and more selecting its less profitable ‘bargain box’ it was effectively cannibalising its own customer base, further eroding both margins and profitability. Adding to its current woes, deliveries were down almost 12 percent in the first 10 months of its financial year to the end of January.
In a statement no doubt intended to offer hope to investors who by now must have lost all faith in the company chair Tony Carter said the board “remained confident” in the long-term outlook for My Food Bag and expects to resume paying dividends next year.
Right now, that seems extremely optimistic.
US stocks come under pressure as data continues to run hot
Stocks in the US fell for the second week in a row as robust economic data continued to stoke investor fears that the Federal Reserve will need to apply a brake to the US economy for longer than anticipated just a month ago.
The blue-chip S&P 500 index fell 0.3 percent for the week, though the tech-heavy Nasdaq Composite managed to finish the week up 0.6 percent.
The S&P 500 index suffered its worst day in a month last Thursday, underscoring the dramatic readjustment in investor expectations on US interest rates after consumer and wholesale price data came in much hotter than expected.
Selling also extended into oil markets with West Texas Intermediate, the US crude benchmark, dropping 2.7 per cent to US$76.34 a barrel.
Retail sales data also showed a sharp jump for January, providing yet more evidence the US economy remains as strong as ever, despite the Fed’s year-long attempt to curb growth and bring down inflation through an aggressive campaign of rate increases.
The new data served to reinforce investors’ fears the Fed will be forced to continue hiking rates in the near term.
New jobless claims filed in the last week came in lower than economists had expected at 194,000, a further sign that the labour market is still tight despite tougher borrowing conditions.
Also unnerving investors, yields on 10-year US Treasuries ended the week at their highest level since late December, while yields on the two-year Treasury note, which is highly sensitive to the expected path of interest rates, reached 4.63 per cent, its highest point since November. Yields rise when bond prices fall.
“The recent strong economic/inflation data has pushed Treasury yields back up to a level that makes it very tough for the stock market to stay up at its current level,” one analyst told the Financial Times.
“When you combine higher yields with the lower earnings estimates we now have for 2023, it creates some more renewed headwinds for a stock market that remains quite expensive.”
Meanwhile, more US central bank officials have come out in favour of staying the course on high interest rates. Loretta Mester, president of the Cleveland Fed, said last week she saw a “compelling case” for a half percentage point rise at the Fed’s next meeting, while St Louis Fed president James Bullard also said he would not rule out an increase of the same size.
Fed governor Michelle Bowman and Thomas Barkin, president of the Richmond Fed, also spoke last week in support of higher rates. “We’re not finished yet. We haven’t beaten inflation,” Bowman said, according to Bloomberg.
The US Federal Reserve will announce its next interest rate decision on March 22.
