New Zealand's stock exchange (NZX) could be facing strong headwinds toward the end of 2022 as third-quarter inflation figures suggest a 75-basis-points hike in the central bank's Official Cash Rate (OCR) in November.
In anticipation of the Reserve Bank rate decision earlier in October, the NZX 50 fell 106.3 points or -1% to 10,959.71. A similar scenario could happen again in the lead-up to the November rate decision.
While the index recovered after the announcement of the third-quarter inflation figures for the country, it was mainly due to a strong overnight rally in the US. However, It did not entirely dissipate concerns that a further interest rate hike is fast approaching, potentially adding uncertainty to an already volatile market.
NZX's reaction to rate decisions and inflation figures
Following the announcement of the third-quarter consumer price index for New Zealand, the S&P/NZX 50 index rose 61.4 points or +0.57% to 10,847.34. The strong overnight rally in the US helped offset a marginal decline in the inflation figure to 7.2% from 7.3%.
The index fell 55.8 points, or -0.51%, to 10,817.23 in the lead-up to the announcement of the inflation figure, proving that if not for the solid overnight rally, closing results for the index would have been very different as a still-high inflation number was expected to dampen sentiment and market activity.
The inflation data has elicited expectations for a 75-basis-point hike in the official cash rate when the Reserve Bank of New Zealand makes its monetary policy decision in November. A hike above 50-basis-points is all but guaranteed.
"If interest rates move higher, stock investors become more reluctant to bid up stock prices because the value of future earnings will look less attractive versus bonds that pay more competitive yields today,"
Explained Rob Haworth, senior investment strategy director at US Bank Wealth Management. He added,
"If higher rates are anticipated in the future, the present value of future earnings for stocks are reduced. If this occurs, it may put more pressure on stock prices,"
Most sectors emerge as losers when interest rates are increased, except for some exceptions, such as the financial sector. Finance is the NZX’s leading sector for the previous three months, racking up gains of +11.34%.
Only three other sectors are in positive territory for this period; Consumer No-Durables (+6.97%), Transportation (+2.74%), and Communications (+1.39%).
What awaits the NZX?
The further rate hike to 4.25% is almost a certainty. At least two Reserve Bank committee members have already expressed they are in favor of a 75-point rate increase. ASB Bank analysts expect the upcoming rate hike to be followed by two more 50-point increases early in 2023 for an expected official cash rate peak of 5.25%.
Economists from the Australia and New Zealand Banking Group are joining the consensus for the rate hike in November and add that a similar decision is anticipated in February 2023. NZ economist Finn Robinson and chief economist Sharon Zollner said,
"Both hikes are contingent on global financial markets keeping it together,"