The US CPI rose by 6.2 per cent in October from a year ago — the fastest annual pace since 1990 and a sharp increase from September's 5.4 per cent.
"Interest rates are absolutely on the move," said Craigs Investment Partners head of private wealth research, Mark Lister.
"And that's been holding our market back," he said.
The debate worldwide has been whether the latest inflation surge is transitory, or something more enduring.
"A lot of it looks more permanent than transitory, so it might be a tough year ahead," Lister said.
The New Zealand market has done "zip" all year.
"That's in dramatic contrast to what we have seen overseas. Europe is up 20 per cent and America is up 20-25 per cent and Australia is up 15 per cent.
"It's been an awful performance relative to overseas markets."
October down
The local market performed poorly over October - dropping by 1.3 per cent while the MSCI world index gained 5.7 per cent.
The key reason is that New Zealand 10-year bonds bumped up from 1.97 per cent to 2.6 per cent over the month, largely in response to the spike in domestic inflation.
"Even though the Reserve Bank has started to tighten, it reflects the chances that inflationary pressure has become widespread," said Salt Funds managing director Matt Goodson.
"It has only some transitory elements and the Reserve Bank is running well behind where the market sees inflation running.
"When interest rates are so low, investors tend to get pushed into the growth-at-any-price stocks," said Goodson. "Then there is the 'no alternative' yield stocks reflecting investors being pushed out of bank deposits.
"That may sound gloomy in part, but historically equities have been a good hedge against inflation."
Pressure on power
Forsyth Barr says rising interest rates continue to put downward pressure on electricity stocks.
In addition, the release of the Electricity Authority's wholesale electricity market review did little to allay fears of regulatory risk, with the authority canvassing opinion on possible structural reform.
"These two issues are the main reasons for our continuing cautious outlook for the sector," the broker said in a research note.
Are electricity stocks immune to interest rate moves?
"In our view, no. The electricity sector has been a yield play for several years and that should not change just because interest rates are rising.
"Whilst there has been some softness in electricity share prices over the past month, they have not moved materially despite the jump in interest rates.
"Although the spread between the 10-year interest rate swap and electricity gross dividend yields has been trending down for several years, the step change downwards in the spread over the past two months has taken it well below the trend line.
"This highlights the potential downside pressure on electricity stocks, as we believe it is unlikely the spread will remain at record lows."
Forsyth Barr said Genesis was the least exposed to a re-rating driven by interest rates, given its high dividend yield.
Xero dips
Shares in New Zealand-based, ASX-listed accounting firm Xero fell sharply after the company reported a $5.9 million loss in the six months to September, compared with a $34.5m profit in the same period a year earlier.
Operating revenue was up 23 per cent to $505.7m and total subscribers increased by 23 per cent to 3 million.
In EBITDA terms, Xero also suffered a 19 per cent decline year-on-year to $98m from $121m.
Free cashflow was also down to $6.4m compared to $54m in the same period last year.
The company said its EBITDA, net profit, and free cashflow fell due to an increased level of investment spending across both sales and marketing, and product development.
Salt Funds' Matt Goodson said it was a slight miss compared with market expectations.
"The key question with Xero is that they are relatively dominant in New Zealand and Australia, and are doing well in the UK, but to get to a big valuation they really do need to have success factored in to the United States, and that is yet to be demonstrated."
Another buy for DGL
DGL Group, which listed on the NZX in May, continues to snap up companies.
The specialist business that manufactures, transports, stores and processes chemicals and hazardous waste, said it had bought Austech Chemicals.
DGL said Austech has successfully developed unique intellectual property for chemical formulations used in the automotive industry.
The company specialises in the manufacturing of non-oil automotive chemicals, such as coolant, brake fluids, solvents, flammables and aerosols.
The deal involved DGL paying $13m in cash and the issue of DGL shares.
All eyes on FPH
All eyes will be on Fisher & Paykel Healthcare - the market's biggest stock - when it reports its six-month result on November 25.
The respiratory products maker has been a clear beneficiary of the Covid-19 pandemic but rates of hospitalisation have been declining, particularly in the US.
In August, F&P Healthcare said revenue for the first four months was $583m, with 74 per cent of revenue coming from the company's hospital products group and 26 per cent from its homecare products.
In constant currency terms, revenue for the four months was 2 per cent below the prior comparable period, which was one of high demand during the initial surges of Covid-19 in North America and Europe.
