Stock Market: NZ shares, Kiwi dollar, interest rates fall as recession looms

The sharemarket, the NZ dollar, and wholesale interest rates have all fallen after worse than expected GDP data. Photo / File

New Zealand shares, the Kiwi dollar and local interest rates all fell in a two-pronged reaction to turmoil on world markets and a sharply weaker GDP result for the December quarter.

Stats NZ data showing the economy shrank by 0.6 per cent over the December quarter, against market expectations of 0.2 per cent fall, raised the spectre of the economy already being in a recession - defined as being two negative quarterly outcomes in a row.

By early afternoon, the sharemarket’s S&P/NZX50 index was off its lows but was still down half a per cent at 11,597.

The kiwi dollar had fallen by just over 20 pips to US61.64c and dropped by about half a cent on the Aussie dollar cross rate - to about A93c.

Key two-year swap rates were down by 7 basis points at 4.94 per cent.

Local markets were already weakening before the GDP data’s release on the back of increased concerns about the world’s banking sector following news that Credit Suisse was again in the credit spotlight, and following on from the collapse of Silicon Valley Bank in the United States last week.

Switzerland’s central bank said it would provide a liquidity backstop to Credit Suisse after its shares fell by as much as 30 per cent, sparking a broader sell-off in European and US bank stocks.

Salt Funds managing director Matt Goodson said the local market had staged a two-pronged reaction to world credit woes and the local GDP data,

“It’s been a bit of both,” he said.

“Obviously, Credit Suisse has been lurking in the background as a possible credit risk for some time,” he said.

“Fears have risen in overseas markets overnight and how it all plays out is still to be fully determined,” he said.

Goodson said that the local GDP data was historical, but that it confirmed what business confidence surveys had been saying for some time.

Thoroughly rattled world markets had led analysts to adjust their official interest rate expectations and NZ has been no exception.

Today’s data will only reinforce that.

“Possibly this may well see the Reserve Bank being less inclined to tighten,” Goodson said.

The Reserve Bank’s next decision is due on April 5.

The GDP fall showed the economy had hit an “air pocket”, Westpac acting chief economist Michael Gordon said.

“While the economy is widely expected to slip into recession as higher interest rates bite, we suspect that the December quarter results represent more of an air-pocket in our descent, rather than an earlier and harder-than-expected landing,” Gordon said.

“Higher-frequency data has actually improved a little in the first two months of this year, and the clean-up from Cyclone Gabrielle will generate extra activity in the coming months that will add to measured GDP,” he said.

BNZ economist Doug Steel said the reaction in the interest rate and currency markets was against the background of extremely volatile world markets.

“At the moment, the swaps market is pricing out the degree of tightening that the Reserve Bank was suggesting, rather than suggesting that rate increases are off the table altogether,” Steel said.