Inflation report could be the decider on a rate cut this month

As the share market continues to power up to ever new records, largely reflecting low interest rates, inflation data out today could determine whether New Zealand gets another rate cut before the end of the month or whether it will have to wait a little longer.

Craigs Investment Partners head of wealth research, Mark Lister, says the New Zealand Top 50 Index gained another 1.7% last week to a record, taking its gain this year to 8.23%.

That annual increase is much stronger than other markets – the ASX200 Index gained 4.45% last week but is down 1.3% for the year to date while the S&P500 Index in the US is up 1.8% so far this year.

“The New Zealand market, in particular, has been exceptionally strong,” Mr Lister says.

“We’re starting to get used to this, with the market just seemingly on a one-way trajectory, just up and up and up.”

Although the market is getting pricey, “the New Zealand share market is still offering a dividend yield on average of about 6% and, with interest rates where they are and going lower, there’s still a lot of demand for any high-yielding investments and 6% simply looks attractive for people.”

Just when local interest rates head lower is the key question because few doubt they will fall further.

Key inflation data
Today’s inflation report may determine whether that happens on April 28 when the Reserve Bank next reviews its official cash rate or whether New Zealand will have to wait until it releases its next monetary policy statement on June 9.

The Reserve Bank has forecast inflation of 0.2% for the March quarter while economists, having had the benefit of more recent data, are expecting just 0.1%.

“If we do get it even weaker than expectations suggest, then you might see expectations for an OCR cut next week rise,” Mr Lister says.

Currently, the market is pricing the chances of an OCR cut next week at 43% while the chances of it happening in early June are priced at 67%.

The other big piece of scheduled news this week is the latest Fonterra global dairy auction, one of only three to go before the dairy giant announces its forecast payout for the 2016/17 season.

Mr Lister says he isn’t expecting any fireworks but that hopefully prices will have at least stabilised after the 2.1% increase at the last auction.

He notes Global Dairy Trade (GDT) prices are still down 12.2% year to date and that other commodities have rebounded much more strongly.

Oil, for example, is up 15.2% year to date.

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