BNZ Research

NZD Corporate FX Update

With strong macro headwinds, our working assumption is that the NZD can trade at a fresh low through Q3, before regaining some poise.

The NZD recently hit a fresh two-year low just below 0.62, coinciding with a 20-year high in the USD DXY index. We’re not convinced that the low for the cycle in the NZD has been reached yet.

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NZD Corporate FX Update

A marked deterioration in the global economic outlook during the current quarter has seen the NZD pummelled and we significantly revised down our projections earlier this month.

Number one on the worry list is China’s zero-COVID strategy, with President Xi steadfastly supporting this policy and staking a lot of political capital on maintaining the stance. This is sending China’s economy on a much lower growth trajectory. Lockdown restrictions are likely to ebb and flow through the rest of the year determined by the spread of Omicron. The NZD will be sensitive to this dynamic, given its strong link to global growth momentum, as well as the spillover effect from likely further yuan weakness.

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NZD downgraded; Winter is coming

We’re not in the habit of regularly changing our NZD projections, even though the temptation is there every week, especially during volatile market conditions. We haven’t changed our NZD/USD projections all year and haven’t felt the need to until recently. The 7% plunge through April, reflecting a build-up of strong negative macro forces now necessitates a complete re-think.

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NZD Corporate FX Update

After a strong recovery, we continue to see the NZD consolidating over the current quarter near 0.70, ahead of potential further upside later this year, but risks are two-sided around that view.

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Upwards momentum

Activity levels in New Zealand’s services sector displayed upwards momentum during May, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

The PSI for May was 55.2 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 3 points from April, and above the long-term average of 53.6 for the survey.

BusinessNZ chief executive Kirk Hope said that the May result represented the highest monthly result since June 2021, and the fourth consecutive time showing increased activity from the previous month. Obviously, any rush to conclude the sector is now firmly back on track needs to be tempered with the fact that there are still a number of potential headwinds coming, both domestically and internationally.

“The two key sub-indexes of New Orders/Business (62.0) and Activity/Sales (59.6) both experienced a healthy pick-up in activity to lead the way in overall expansion. While Employment (48.5) went back into contraction during May, Supplier Deliveries (45.0) recovered somewhat from earlier lows.”

With the pick-up in expansion, the proportion of negative and positive comments were exactly even for May, compared with 61.9% of negative comments in April.

BNZ Senior Economist Doug Steel said that “while the improvement was far from universal across components, reflecting many ongoing challenges across segments of the service sector, the overall outcome was the first above average result since the outbreak of Delta in August last year.”

Soldering

New Zealand’s manufacturing sector remained under its long-term average level of activity for May, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for May was 52.9 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). While this was 1.7 points higher than April, it was still below the longterm average of 53.1 for the survey.

BusinessNZ’s Director, Advocacy Catherine Beard said that the pick-up in activity for May continued the recent trend of results where activity remains within a relatively narrow band of expansion.

“While both Production (52.8) and Delivery of Raw Materials (55.4) both managed to return to expansion for May, the other key sub-index of New Orders (53.0) recorded its lowest level of activity since the August lockdown in 2021. Overall, any sustained move towards historical levels of expansion requires a healthy level of new orders, which has averaged 55.0 since the survey began.”

Manufacturers continue to have a more negative mindset during May, with the proportion of negative comments at 72.7%, compared with 70.3 in April and 64.2% in March. While COVID and related issues remain a key influence, skill/labour shortages are also regularly mentioned.

BNZ Senior Economist, Craig Ebert stated that “The net result of the sub-index values was the inference that excess demand alleviated during May. New orders are perhaps the cleanest representation of demand, while deliveries speak more to the supply side. To the extent excess demand is abating, so too will be core inflation pressure”.

When a Boom is a Bust

Noise, noise, noise and more noise sums up New Zealand’s GDP data. Fluctuating levels and variations of COVID, accompanied by equal volatility in Government imposed restrictions have completely messed up New Zealand’s GDP track over the last four quarters (not to mention those prior).

Hard Pressed

May’s data from SEEK indicate New Zealand’s labour market is still very hard pressed. The 2.5% monthly advance in job ads replicated the solid pulse from April, maintaining annual growth around the 15% mark. Compared to December, ad numbers are up 17% (seasonally adjusted). It’s clear from the trend measure also, that advertising has barrelled right the way through Omicron’s disruptive influence, which began early in the year. Whether about businesses wanting to get extra cover because of COVID-induced absenteeism, or just them wanting to better meet customer demand fundamentally, heightened job ads portray exceptionally strong demand for staff at present.

Stagflation

The RBNZ is “confident” the New Zealand economy can avoid a hard landing. We are not so confident. Our forecasts contain just a modest recession but the risks of something much deeper are rising by the day. Today’s ANZ Business survey clearly highlights this. If the RBNZ does push the cash rate to 3.9%, as it projects, the odds of a significant economic correction will be further elevated.

RBNZ Signalling Necessity of Recession

What a difference a month makes. From an April statement that affirmed the OCR peak of February’s Monetary Policy Statement (MPS), the RBNZ has today lifted that peak 60 basis points, to 3.95%. The Bank has clearly gotten nervous, all of a sudden, about achieving its inflation mandate, while seeing, more clearly, the necessity of higher unemployment to bring this about.

Retail Ructions

Today’s Q1 retail sales data confirm our thinking about the economy in two key respects. First and foremost, there is an extraordinary amount of noise in macroeconomic data at present such that one should not get too hung up on the decimal points in practically any data outcome at present. Second, through the noise, it looks like the economy struggled to grow in Q1.

Budget Battles Inflation

OBEGAL returns to surplus, of 0.6% of GDP, in 2024/25. The deficit peaks at 5.2% of GDP in the June year 2022. A deficit of 1.7% is expected for the June year 2023.

Net core crown debt, measured the new way, is expected to rise to a peak of 19.9% in June 2024. Its trough was 1.8% in 2019. The impact of Covid is clear. Under the “old” measure net core crown debt peaks at 41.2% well below the Government’s new peak allowance of 50%.

RBNZ Monetary Policy Preview

The Reserve Bank’s task is clear. At its most basic level it has to get current annual inflation of around 7.0% down to 2.0% and it will require the unemployment rate, now 3.2%, to rise to around 4.5% to meet its maximum sustainable employment objective.

Evening out

Activity levels in New Zealand’s services sector during April were almost identical to March, according to the BNZ - BusinessNZ Performance of Services Index
(PSI).

The PSI for April was 51.4 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was down 0.1 points from March, and still below the long-term average of 53.6 for the survey.

BusinessNZ chief executive Kirk Hope said that while the April result remained in positive territory, the fickle nature of some of the key sub-index values means a consistent trend towards expansion at traditional levels still seems some way off.

“The two key sub-indexes of New Orders/Business (53.6) and Activity/Sales (52.7) both experienced a drop in expansion levels for April. While Employment (51.2) saw its first expansionary result since November 2021, Supplier Deliveries (40.1) remains entrenched in contraction.”

Despite a similar overall result to the previous month, the proportion of negative comments increased from 57.5% in March to 61.9% in April.

BNZ Senior Economist Doug Steel said that “for large parts of the service sector that have been through the ringer over recent times, we suspect any result above breakeven would be welcomed. But, on the other hand, April’s result also looks somewhat disappointing in the context of easing COVID restrictions (from Red to Orange) halfway through the month.”

Slow Grind

New Zealand’s manufacturing sector experienced a lower level of expansion during April, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for April was 51.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 2.5 points lower than March, and the lowest monthly result since August 2021.

BusinessNZ’s Director, Advocacy Catherine Beard said that after steady expansionary results over recent months, the April result highlighted the fickle nature of what manufacturers are currently experiencing.
“In terms of the main sub-indices, New Orders (56.0) continued its positive
stance, although Production (49.1) fell back into contraction. Employment (49.8) also contracted after two months of expansion, while Deliveries experienced its first level of contraction since November 2021.”

Manufacturers were in a more negative mindset during April, with the proportion of negative comments increasing from 64.2% in March to 70.3% in April. While COVID features strongly in discussion, skill/labour shortages and supply chain disruptions are also prevalent.

BNZ Senior Economist, Craig Ebert stated that “supply problems certainly featured extensively in respondents’ comments, including inferences that COVID, and related absenteeism, remains a big issue, even with recorded case numbers having peaked back in March. This provides valuable context to the negativity in the PMI’s jobs index.”

Recession Bells Are Tolling

The chances of the New Zealand economy moving into recession are rising by the day. New Zealand’s economic “imbalances” continue to be exposed at a time when the global economy is increasingly coming under duress. The policy measures taken to “fix” these issues are getting more and more aggressive. The chance of a soft landing is fading.

Still On The Up

If the 2.4% increase in March’s job advertising was about getting past the worst of Omicron’s spike, the 2.6% gain in April was an indication there is broader-based momentum at play now. And, yes, this marks a novel record high. Then again, this is consistent with employment intentions, from various business surveys, being solid, even with the recent economic challenges and the official news of rising wage inflation.

Very Tight Labour Market Fanning Wage Inflation

If there was a surprise in this morning’s Q1 labour market data, it was that they weren’t messed around by Omicron’s ferocious surge in the quarter. As they turned out, the results were very much in line with expectations, and widely drawn impressions, that New Zealand’s labour market remains exceptionally tight, and increasingly inflationary.

When It All Starts to Get Too Much

We might have expected some better confidence and activity readings to be poking through in today’s ANZ business survey, after the initial shock and awe from Omicron’s skyrocket back in February. It didn’t really occur, with net confidence essentially unchanged at -42 in April and own-activity expectations up to just +8, from +3 in March. Still, the survey’s inflation gauges remained broadly extreme.

Small Mercies in Q1’s High Inflation

Today’s headline Q1 CPI wasn’t quite as inflationary as anticipated. However, it’s far too early to read this as the calculus starting to settle down, from the latest heights that inflation has scaled. And certainly not in a core sense. Still, the result suggests the RBNZ will feel it can at least take stock, as it gauges the extent to which it will need to barrel on with its tightening cycle, in order to bring inflation right back down.

In the black

After seven months in contraction, activity levels in New Zealand’s services sector saw expansion in March, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

The PSI for March was 51.6 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). This was up 2.7 points from February, but still below the long-term average of 53.6 for the survey.

BusinessNZ chief executive Kirk Hope said that after a difficult period for many businesses in the services sector, a return to overall expansion was welcomed. However, the underlying results show there is still some way to go to return to what many would consider business as usual.

“The two key sub-indexes of New Orders/Business (60.1) and Activity/Sales (53.8) both continued their upwards momentum. However, Employment (48.5) and Supplier Deliveries (40.1) remain in contraction. In addition, the proportion of negative comments stands at 57.5%, although this is down from 61.5% in February.”

BNZ Senior Economist Craig Ebert said that “despite some horribly weak components, the PSI supported the idea that GDP is on track to recover in Q2, after a flat-to-negative performance in Q1.”

Pros and Cons

New Zealand’s manufacturing sector saw another, albeit slight, improvement in its level of expansion, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for March was 53.8 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 0.2 points higher than February, and above the long-term average of 53.1 for the survey.

BusinessNZ’s Director, Advocacy Catherine Beard said that the March result was another encouraging step towards getting the sector back on track.
“In terms of the main sub-indices, New Orders (61.0) continued its healthy momentum upwards, although Production (50.9) did fall back to its level of expansion experienced in January. Employment (52.4) rose to its highest level since September 2021, while Finished Stocks (53.5) also picked up to its highest result since October 2021.”

Comments from manufacturers were still firmly in negative territory (64.2%), although down from 69.9% in February. Unsurprisingly, COVID dominates discussion, with supply chain disruptions one of the key outcomes.

BNZ Senior Economist, Doug Steel stated that “Omicron’s impact may not be as harsh as the first 2020 COVID lockdown or last year’s Delta lockdown, but it’s there. Production has struggled, with the index slipping to 50.9 in March and a bit further below its long-term average.”

A Dovish Hike

The world continues to get more bizarre by the day. We had never contemplated using the phrase a “dovish-hike” to describe a 50 basis points rate increase (the largest rate hike in 22 years!). But that is exactly what appears to be the case today.

Squeezed into submission!

Inflationary pressures are high and rising, the labour market is extremely tight, supply issues are horrendous, profits are under pressure, growth is getting thumped by all of the above (and Omicron) and confidence is shattered.

Looking Up

Job advertising kept increasing in March, to a fresh record high. This is fundamentally encouraging, given the peak in Omicron cases that transpired during the month. Businesses, it would seem, are thinking it through, and thinking ahead.

RBNZ MPR Preview

The cash rate is going up and it will probably continue doing so until it’s well through neutral. This much we can be relatively sure of. What is less sure is the what the Reserve Bank should, or will, do at next Wednesday’s Monetary Policy Review.

NZD recovers from 2-year low during May

• While there were notable swings in bonds, currencies and equities in May, net monthly changes were modest
• NZD/USD fell to a 2-year low before a strong recovery ensued, ending the month up less than 1%
• Stagflation risks remained evident, with weak growth indicators against a strong inflation pulse

NZD plunges 7% in April as USD surges

• In April, the NZD hit both its high and low for the year, such was the extent of the NZD’s rapid decline from early April
• The USD surged to a 20-year high as Fed policy makers sanctioned a front-loaded tightening cycle; US 10-year up 60bps
• Much weaker risk appetite, spillover from Chinese yuan depreciation, and the soft NZ economy added to the NZD’s demise

Commodity currencies outperform in March

• Higher risk appetite and broad-based commodity price strength helped drive the NZD up 2½% in March
• Big gains on NZD crosses, as JPY, EUR and GBP all weakened; AUD outperformed and NZD/AUD hit a fresh nine-month low
• Global rates moved significantly higher as monetary policy tightening expectations ramped up

NZGB issuance increased, but WGBI entry to help offset

NZDM announced a $26b increase to forecast bond issuance alongside today’s Budget. The increase to the bond programme mainly reflects the RBNZ’s intention to start selling its LSAP holdings of NZGBs – back to NZDM – from July. The RBNZ’s planned $5b per annum LSAP sales ($20b over the four years in the forecast horizon) directly increase NZDM’s funding requirement and have flowed through into a larger borrowing programme.

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NZGB issuance likely to be revised higher at Budget

NZDM will update the bond programme alongside the release of the Budget on May 19th.

For recollection, at its last update, at December’s HYEFU, NZDM slashed its bond programme by a cumulative $31b across the forecast horizon. This reduction to forecast bond issuance in December was driven by upward revisions to Treasury’s growth and tax revenue as well as NZDM’s decision to start running down its large liquid assets buffer. Issuance for the current 2021/22 fiscal year, ending in June, was marked down from $30b to just $20b.

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Outlook for Borrowers: Post-April MPR

The RBNZ raised the OCR by 50bps, to 1.50%, at yesterday’s MPR. Markets had been pricing around a 75% chance of such a move while economists had generally couched the decision as a line-ball call with a 25bps move.

NZ short end has room to rally further post RBNZ

We have been highlighting in recent research that we see value in short to mid curve NZ rates. We were too early on our received NZD 5yr swap trade idea, which we stopped out of a week ago, but we think the original rationale still holds. We had anticipated that global rates were due to consolidate and, with so much tightening priced into the NZ curve, the risk-reward looked attractive to receive NZ. As it happened, global rates continued to explode higher and NZ followed with little resistance, with investors wary of standing in the way of the market’s momentum.

Full interest rate research is available to BNZ Wholesale Clients upon request, please email BNZ_Research@bnz.co.nz to subscribe

NZ rates update: Plenty of tightening priced in

NZ rates have started 2022 as they did 2021: surging higher. Swap rates across the curve have been setting fresh multi-year highs on a weekly basis. The surge higher in rates, which started in July last year, is now the largest post-GFC increase (see Chart 1). Indeed, if we connect the 2020 and 2021 moves together, this is by far the biggest increase in NZ rates since the GFC.

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Second Round Less Than The First?

Evidence of what might be called second round inflationary effects continues to mount. We are well beyond commodity price spikes or direct supply side driven price squeezes. Reports of rising prices remain prevalent. None of this is particularly surprising but it does reinforce the robust inflationary pressures currently circulating. Labour market indicators point to extreme tightness which is expected to continue for sometime yet. However, we note the odd forward looking indicator of the labour market has dipped a bit. This week’s business and consumer surveys should help shed more light on all the above.

Stars Aligning for a Q2 GDP Bounce?

After last week’s reported 0.2% decline in GDP for Q1, we remain firmly of the view there will be a solid bounce in Q2 (with today’s PSI for May, up at 55.2, supportive of that view). Not only was Q1 GDP in the bounds of what we anticipated but its details also conformed reasonably well to our expectations. Folk should thus not confuse the recession call we have pitched for later down the track, with the idea that Q2 2022 GDP will confirm a technical recession is already here. That stated, we remain wary of a broader downcycle in the economy, as the “natural” end game to all this inflation.

Q1 GDP’s Recession Teaser

For Thursday’s Q1 GDP we are expecting to see a lot of ups and downs in its components, with a roughly flat quarterly result overall. It would be hard to treat this as a bad outcome, however, when 1) it would still deliver annual growth of 1.8% and leave real GDP 3.5% north of its pre-pandemic level, 2) COVID finally burst the community’s defences (with a vengeance) during the quarter, and 3) we forecast growth of 2.0% in Q2 GDP (with upside). Be that as it may, our expectation on Q1 GDP is clearly below market and RBNZ expectations, which might overly excite some about immediate recession and RBNZ pause for thought.

So What If Q1 GDP Undershoots RBNZ Expectations?

As we look out to Friday’s “partials”, we anticipate – as we have done for a while now – a flat result on Q1 GDP (due for release 16 June). And we still like the chances of a solid bounce in Q2 GDP, in the order of 2.0%. Curiously, the RBNZ went for a 0.7% increase in Q1 GDP in its May MPS, which, from what we know today, might seem hard to achieve. But the Bank also had a 1.3% increase for Q2 GDP, which might prove a bit light. Overall, this nets out as close to what we anticipate across H1 2022 as a whole.

Expectations Great and Small

Tuesday afternoon’s ANZ business survey will illuminate how the battle between intense inflation pressure and slow growth is going. At the pointy end of this, profit expectations have been coming under duress, as strong intentions to hike prices struggle to keep pace with the sheer degree of cost inflation being signalled by respondents. Also note speeches by RBNZ Deputy Governor Christian Hawkesby set for this week, as timely post-MPS steers.

RBNZ Tightens Amidst Confusion

The focal point of the week ahead is Wednesday’s RBNZ Monetary Policy Statement. We published our full preview of this last Wednesday (May 18). Nothing has happened since then to alter our perceptions of how the RBNZ might see the world, so we expect the Bank to: hike the OCR 50 basis points to 2.00%, published a rate track consistent with 25 basis point increases at each of the next four meetings and a ‘terminal’ rate of under 4% and mostly likely centred near 3.5%. Regards this week’s data, we think Q1 retail sales will be bolstered by car sales, but weaker underneath. Consumer confidence will still be troubled by a multitude of forces. And while Fonterra’s first forecast for the new milk season is shaping up to be of similar magnitude to that for the season just ending, costs are rising and uncertainty around the way forward is elevated.

A Climate for Fiscal Slippage

With today’s release of the momentous Emissions Reduction Plan (ERP) there might seem little of consequence left for Thursday’s Budget to account for. Yet there are still significant fiscal matters to understand. Like the delayed return to surplus that Finance Minister Robertson has admitted to when the tax take is running so far ahead of expectations. Like the lack of any operating surplus near-term, when the economy is so pumped up (implying a structural deficit is being brewed). Like the government’s spending-to-GDP target that didn’t seem to appear in the revamped fiscal rules.

This Ruddy Nominal Economy

There is a good smattering of NZ information on offer this week. However, the scene-setter will arguably be Thursday morning’s pre-Budget speech by Grant Robertson. With the Finance Minister already having admitted the return to fiscal surplus will be delayed a year (compared to December’s HYEFU forecasts) we are left wondering what has driven the postponement. If not because of downgraded macro-economic forecasts in next week’s Budget, it suggests some sort of fiscal stimulus is in the wings (something the RBNZ would be most interested in, no doubt).

With Omicron-Affected Labour Data, Watch Wages

While Wednesday’s Q1 labour market data could easily be messed up by Omicron, there’s little argument that New Zealand’s labour market is exceptionally tight. And, so, it pays to think about how much further nominal wage inflation will pick up on the back of this. We also recommend close attention be paid to Finance Minister Robertson’s pre-Budget speech, which kicks off Tuesday 7:30am (NZT).

Pressing On

It might have surprised many, including the RBNZ, that the Bank’s sectoral factor model estimate of inflation picked up to an annual pace of 4.2% in Q1, from 3.8% in Q4 (revised from 3.2%), and 2.0% at the outset of the pandemic. Then again, this is about what happened to it the last time New Zealand’s unemployment rate pressed below its equilibrium (NAIRU) level, over the 2003-07 economic cycle. In this sense, there is nothing especially unusual about the pick-up in core inflation rates we’re now seeing.

Sooner Not (Necessarily) More

Everyone, including the RBNZ, appreciates that Thursday’s Q1 CPI report will print stronger than the Bank’s last set of forecasts (the Feb MPS) anticipated. For more timely and broader context around monetary policy, there was parsing to do on Adrian Orr’s recorded interview (with the IMF), which was released first thing this morning. This made it clear the RBNZ is on a mission to contain inflation. But for every line of Orr’s that looked like a hawkish nudge there was another to give it some conditionality. The 50-point hike last week was an eye to doing things sooner, rather than (ultimately) more.

Confusion Still Reigns

We have no idea what, exactly, the RBNZ will do with the cash rate on Wednesday afternoon. The debate amongst financial market participants is whether the RBNZ will hike the rate 25 or 50 basis points. There are very sound arguments for either approach. At the margin, we think the case for 25 is more compelling but we do understand why the MPC members could conclude otherwise.

BNZ Markets Today

Risk sentiment improved at the end of last week, with evidently less concern about inflation or a possible hard landing for the US economy. The S&P500 surged over 3% on Friday, adding to gains seen earlier in the week. After falling as low as 3.00% late last week the US 10-year rate closed at 3.13%. Positive risk sentiment drove the NZD and AUD higher, to about 0.6320 and 0.6940 respectively.

BNZ Markets Today

US equity futures fell during Asian trading, but after a weak open, the S&P500 has managed to recover back into positive territory. The bond market showed no signs of turnaround, with lower rates through Asian trading extending overnight and UST yields currently showing meaty falls for the day. The AUD and NZD have been the weakest performers over the past 24 hours. NZD has recovered to just under 0.63 after falling below 0.6250 overnight.

BNZ Markets Today

Newsflow has remained light but the positive start to the week for risk appetite has extended overnight, with strong gains for US equities and global rates pushing higher. The yen continues to face downward pressure, with USD/JPY breaking above 136 for the first time since 1998. The NZD has largely tracked sideways and other currency moves excluding the yen have been small.

BNZ Markets Today

There has been little news overnight and US markets are closed for a public holiday. After wild financial markets last week, risk appetite has ticked higher, with US equity futures rebounding and Treasury futures implying slightly higher yields. Currency moves have been muted, with commodity currencies showing some mild upside.

BNZ Markets Today

On Friday, net changes in equities and rates were modest by recent standards, but this capped off a wild week in markets that saw US and European equities down in the order of 4-6%, and the US 10-year rate trade in a 35bps range. In currency markets the yen came under pressure as the BoJ made no tweaks to policy, maintaining its ultra-easy policy stance, against the global trend. Oil prices plunged and other commodities were weaker as investors considered recession risks for the global economy. AUD suffered against this backdrop, tumbling to a low just under 0.69.

BNZ Markets Today

There have been some chunky moves in financial markets, in the aftermath of the super-sized 75bps hike by the Fed yesterday, followed up by a 25bps hike by the BoE and a surprise 50bps hike by the Swiss National Bank. US and European equities are significantly weaker, global rates are mostly higher, while the USD has taken a big tumble despite the risk-off backdrop. CHF, GBP and JPY lead overnight gains, while the NZD is up about 1½% to just under 0.64.

BNZ Markets Today

Lots of action in markets overnight, before and after this morning’s FOMC update. The net result sees rates lower and equities are higher. The S&P500 up more than 1% as we go to print. In currencies, the USD is weaker and commodity currencies higher as broader risk appetite improves. AUD has surged nearly 2%, up to 0.70. NZD is up more than 1% approaching 0.63. USD/JPY has fallen back below 134. Conditions remain volatile post this morning’s Fed announcement.

BNZ Markets Today

Global rates continue to soar as the market prices in more aggressive policy tightening ahead, with a 75bps hike by the Fed this week now seen as a shoo-in, and now a good chance priced that the RBNZ does the same next month. US equities have been choppy, trading in and out of positive territory. The USD DXY index has traded up to a fresh 20-year high. The NZD traded down to a fresh 2-year low just above 0.62 but GBP has performed worse, taking a peek below 1.20.

BNZ Markets Today

Markets are in turmoil with few safe hiding places, with a plunge in global equities, surging global rates, wider credit spreads, and mostly weaker commodity markets. The safe-haven JPY and USD currencies have significantly outperformed. The NZD and AUD show the largest falls, down to 0.6260 and 0.6930 respectively.

BNZ Markets Today

On Friday, another US CPI shocker sent markets in a tailspin, driving US equities down about 3%, a sharp flattening in the US Treasuries curve, led by a 25bps increase in the 2-year rate, and the USD higher. Euro area peripheral bond spreads continued to widen in the aftermath of the ECB meeting, a trend that needs to be monitored carefully. The NZD was trying to recover Friday evening, but USD strength pulled it down and it closed the week about 0.6360, but with gains on most of the key crosses. NZ rates continued to rise, with the 10-year government bond closing at a fresh 7-year high of 3.93%.

BNZ Markets Today

Markets are in a risk-off mood, with lower global equities and safe-haven currencies outperforming. Commodity currencies have been whacked overnight, seeing the NZD fall below 0.64. The euro is weaker despite the ECB tilting in a more hawkish direction and providing some clear guidance on future rate hikes. European yields are much higher, while US Treasuries have been in a holding pattern ahead of CPI data tonight. NZ’s 10-year government bond yield rose to a fresh 7-year high after the RBNZ outlined more detail on its LSAP sales.

BNZ Markets Today

A generally gloomy mood in markets overnight, with little new news but ongoing concerns around high inflation and slowing growth. Oil prices have pushed higher as have global rates, driven by the long end. Equites are generally lower. In currencies, the US dollar is marginally stronger while USD/JPY has continued its surge higher. There wasn’t a whole of news out overnight, with markets focused on tonight’s ECB meeting and Friday’s US CPI.

Markets Today

There has been little fresh news overnight to drive markets, with investors waiting for the ECB meeting and US CPI data later this week. Global 10-year rates have reversed most of their sharp move higher over the long weekend, the US 10-year rate now back below 3%, while US equities have managed modest gains. The pullback in rates hasn’t done much to support the JPY, with USD/JPY hitting a fresh 20-year high of 133 overnight. Meanwhile, the RBA raised rates by a larger-than-expected 50bps yesterday, leading to a big move higher in Australian short-term rates and driving the NZD/AUD cross below 0.90.

Markets Today

A robust US nonfarm payrolls report and further steps by China to loosen Covid-19 restrictions have pushed global rates higher, with the US 10-year rate breaking back above 3% overnight. The higher rates backdrop has hit US equity markets, with the S&P500 around 1.5% lower than Friday morning’s close. The USD is broadly stronger, sending the NZD back below 0.65 and USD/JPY up to a fresh 20-year high, just below 132. It’s a big week ahead. The RBA is expected to raise rates today, with the market roughly split between a 25bps hike and a 40bps move, and US CPI data and the ECB policy meeting later in the week.

Markets Today

A notable market move overnight has been broad-based weakness in the USD, with higher risk appetite and a weak ADP payrolls print thrown into the mix. Strength in commodity prices have supported the NZD and AUD both well up over 1%. US Treasury yields have been well contained, even with more hawkish talk from Fed Chair Brainard.

BNZ Markets Today

Inflation has returned as the market’s focus, given yesterday’s shocking German CPI data and followed up by a record lift in euro area CPI inflation. European rates are up for a second day running, and the US 10-year rate is up 10bps from Friday’s close, after the Monday holiday. The higher rates backdrop means that there has been no follow through of last week’s strong rebound in US equities, investors adopting a more cautious tone. The NZD has drifted lower, not helped by growing fears of stagflation

BNZ Markets Today

The US Memorial Day holiday has been a moderating factor in market movements. However, the positive inflation surprises keep on coming and the latest update from Germany was a complete shocker, driving global rates and EUR higher as the market eyes up the ECB meeting next week. The surprise hasn’t got in the way of risk sentiment improving, with US equity market futures showing modest gains and the NZD edging higher.

BNZ Markets Today

Risk assets ended last week on the strong note (S&P500 +2.5%) as global recession concerns appeared to diminish. This helped drive a strong rally in the NZD and other commodity currencies, the NZD closing above 0.65 for the first time since early May. Global rates were flat-to-lower on Friday while NZ short-term rates pushed higher again, with the market continuing to digest the RBNZ’s hawkish messaging from last week’s MPS.

BNZ Markets Today

US stocks have charged higher after some positive earnings reports from retailers, guidance from which the market is evidently sensitive to. By contrast, bond and currency markets have been calm for another session and haven’t responded to the positive equity market backdrop.

BNZ Markets Today

The RBNZ sprung a hawkish surprise at the MPS yesterday, significantly revising up its forecast OCR track to show a peak of just under 4%. NZ rates moved sharply higher as a result, with the market moving to broadly align itself with the RBNZ’s new projections, while the NZD/AUD cross has reached a four-week high. It’s been a quieter night in global markets. Equity markets are generally higher, helped by the release of the FOMC minutes which hinted at a possible pause in the tightening cycle later this year, global rates are little changed, while the USD is a touch stronger.

BNZ Markets Today

After a positive start to the week, risk sentiment is weaker again on the back of concerns about the earnings and growth outlook. This sees weaker global equities and global rates lower. Currency movements reflect the dataflow and sentiment, with GBP dragged down on a very weak PMI reading. EUR has been supported by some hawkish commentary from a couple of ECB GC members. The USD has been pulled in opposing directions, leaving the NZD around 0.6450.

BNZ Markets Today

The new week has kicked off with a lift in risk appetite, with global equities markets showing some decent gains, higher global rates and weaker safe-haven currencies like JPY and the USD. The NZD has been a beneficiary of the change in sentiment, gaining 1% to 0.6460 during local trading hours and little net gain overnight.

BNZ Markets Today

The S&P500 briefly crossed over into bear market territory on Friday, fanning recession fears, before recovering late in the session to end unchanged. Despite the late recovery, risk appetite remains very cautious, and investors remain concerned about the outlook for global growth amidst Chinese lockdowns, aggressive central bank tightening and the ongoing war in Ukraine. Bond yields remain under downward pressure on growing recession fears, with both the US and NZ 10-year rates falling to their lowest closes in almost a month. Currency moves were relatively modest on Friday, with the NZD ending the week just above the 0.64 mark. This week brings the RBNZ MPS, where the Bank is universally expected to raise the OCR by 50bps, to 2%.

BNZ Markets Today

After yesterday’s 4% plunge in the S&P500, investors remain cautious. Growth fears for the US economy have resulted in notable weakness in the USD while US rates have pushed lower, led by the short-end of the curve, as traders pare bare monetary policy tightening expectations a little. The NZD has traded back up to 0.64.

BNZ Markets Today

US equities have plunged as some poor earnings results from the retailers provide a reality check on how damaging a high inflationary environment can be. Bonds have found a safe-haven bid and so have JPY, CHF. The USD has also been well supported. The NZD has fallen back down towards 0.63, but GBP has been the worst performing following another strong inflation report.

BNZ Markets Today

Risk appetite has recovered as investors eye up easing lockdown restriction in China and some stronger economic data have supported the positive mood. Central bank speak has remained hawkish, but not enough to prevent equity markets from rallying. Global rates are much higher and European currencies have been the best performing.

BNZ Markets Today

Some poor China economic data set the scene for a risk-off vibe to start the new week, with weaker US equity markets, lower global rates and the NZD weakening towards 0.62 before a significant turnaround overnight ensued. The US S&P500 now shows a modest gain and the NZD has recovered strongly to break up through 0.63.

BNZ Markets Today

Risk assets ended last week on a positive note, with equities rebounding strongly on Friday from their heavy falls earlier in the week. News that Shanghai was planning to start removing restrictions this week was taken positively by the market although the rebound was likely as much to do with a correction from oversold levels as a change in investors’ economic outlook. Global rates and commodity currencies rebounded as well, with the NZD ending the week back at around 0.6785. Friday saw large falls in NZ wholesale rates, with the market trimming expectations of RBNZ OCR hikes over the next year.

BNZ Markets Today

Markets remain firmly in risk-off mode as concerns grow that the global economy is heading towards a recession. The unfolding energy crisis in Europe, concerns that Beijing could be plunged into lockdown at any point, and expectations of aggressive rate hikes from central banks are all weighing on sentiment. Equity markets continue to tumble, with the S&P500 down another 1.8% overnight, to now be on cusp of a bear market, while industrial commodity prices and global rates have fallen sharply on global growth fears. The EUR has plunged more than 1%, to near its lowest level since 2003, amidst the escalating energy crisis in Europe while the NZD and AUD have both tumbled to fresh lows. Yesterday saw the market pare back OCR rate hike expectations after the RBNZ’s inflation expectations series didn’t increase by as much as feared.

BNZ Markets Today

Risk sentiment soured after the US CPI report showed stronger than expected inflationary pressure, driving the S&P500 down to a fresh low. The US yield curve has flattened, with higher short rates and lower long-term rates. The yen has been well supported against the backdrop of a lower US 10-year rate, while GBP is weaker as Brexit headlines return to the front pages. The NZD has traded a full 1-cent range in the aftermath of the US CPI report and is currently hovering near 0.63.

BNZ Markets Today

There has been something of a turnaround in risk sentiment overnight, with equities bouncing back from their recent heavy falls. Long-term global rates have fallen amidst lower market-implied inflation expectations, with US 10-year rate back below the 3% mark and the German 10-year rate below 1%. The improvement in risk sentiment hasn’t done much to help the NZD however, which has hit a fresh year-to-date low below 63 cents.

BNZ Markets Today

Global equities and industrial commodities continue to tumble on rising global growth concerns, with heavy losses seen across all the major equity indices overnight. The CNY has continued its recent sharp downtrend while the NZD and AUD have fallen more than 1%, with both hitting fresh lows for the year. US Treasury rates have fallen back amidst the risk-off backdrop, although the 10-year rate continues to trade above 3%.

BNZ Markets Today

US and German 10-year rates surged to fresh cycle highs on Friday amidst continued hawkish rhetoric from the Fed and ECB. The nonfarm payrolls report suggested the pace of US wage growth may be easing although this is highly unlikely to prevent another 50bps Fed rate hike next month. Meanwhile, equities, base metals and commodity currencies remain under downward pressure on growing concerns around the global growth outlook, the NZD ending the week just above the 0.64 mark. Russia marks Victory Day tonight amidst speculation Putin could use the occasion to formally declare war on Ukraine.

BNZ Markets Today

The post-FOMC rally in risk assets and bonds didn’t even last 24 hours, with markets seeing a massive reversal overnight as stagflationary fears dominate. The US 10-year rate has made a new cycle high of 3.11% and is currently 12bps higher on the day, while the USD has hit a fresh 20-year high. Equities have crumbled as rates have taken off, with the NASDAQ currently down over 5% and the S&P500 more than 4% lower. The NZD and AUD are down by more than 2% amidst a broad-based risk-off move, the NZD currently trading just above 0.64. The GBP is another key underperformer overnight, down by 2.2%, after the BoE painted a grim picture of the UK economic outlook and sounded cautious about the need for future policy tightening.

BNZ Markets Today

There was no surprise in the Fed’s 50bps hike, plans for further hikes, or plans for quantitative tightening but the market has reacted to Chair Powell’s comment that seemed to rule out hike steps of 75bps. The US yield curve has steepened on that, with a large fall in the 2-year rate, while the 10-year rate is down 6bps to 2.91%. The USD has broadly weakened, seeing the NZD back up through 0.65. AUD outperformance has seen NZD/AUD almost break below 0.90.

BNZ Markets Today

US equity markets remain choppy and currently show a modest gain, following a strong late rally yesterday. The US 10-year rate has pushed slightly lower after returning to the 3% mark. The AUD has been the best major since this time yesterday, although the net gain came ahead of a hawkish policy update alongside the RBA’s first rate hike this cycle. The NZD hit a fresh near 2-year low last night, but now shows a small gain from his time yesterday, while the RBA’s move sent NZD/AUD lower. The GDT auction was very weak.

BNZ Markets Today

By recent standards it has been a quiet trading session with little news, with the UK and some key Asian markets on holiday. But the new month has begun with the same trends as we saw through April – weaker equities, higher rates and a stronger USD. The NZD has traded at a fresh near 2-year low. The US 10-year Treasury rate cracked the 3% mark for the first time this cycle.

BNZ Markets Today

Global rates moved sharply higher again on Friday, following upside surprises to US wage data and European core inflation. The Fed is almost universally expected to raise its cash rate by 50bps this week, but the market has moved to price an almost 50% chance of a 75bps hike (!) in June. The prospect of aggressive central bank tightening and underwhelming earnings outlooks from Amazon and Apple saw the S&P500 and NASDAQ plunge by around 4%, capping off a dreadful month for risk assets. The NZD and AUD were weaker on Friday amidst weaker risk appetite, the NZD ending just above 0.6450, a more than 7% fall on the month.

BNZ Markets Today

The main story over the past 24 hours has been the sharp weakening in the JPY, with USD/JPY blowing through 130 overnight after the BoJ stood firm on its commitment to cap Japanese rates under its Yield Curve Control policy.

BNZ Markets Today

There has been some recovery in risk appetite overnight, with equities rebounding from yesterday’s heavy falls and the US 10-year rate bouncing back to 2.82%. However, the USD remains firmly on the front foot, with the DXY index briefly surpassing its early-2020 highs and hitting its highest level in five years. USD strength partly reflects weakness in the EUR, which remains under pressure amidst an intensifying energy crisis on the continent, as Russia cuts off gas supplies to Poland and Bulgaria. The NZD printed a year-to-date low overnight, although, like the AUD, it has held up relatively well amidst some signs of stability in the CNH. The AUD was also supported by a big upside surprise to Australian CPI, cementing expectations the RBA will kick off its tightening cycle next week. NZ short-term rates continue to relentless push higher.

BNZ Markets Today

It’s been another ‘risk-off’ session across markets overnight on growing concerns around the global growth outlook. Equities and bond yields have fallen sharply while the USD and JPY have appreciated. The NZD has dropped below 0.66 amidst broad-based USD strength and mounting risk aversion

BNZ Markets Today

It has been an ostensibly risk-off environment since we left for the long weekend, with a chunky fall in global equity markets and the VIX index piercing 30. Fears of how a front-loaded Fed tightening cycle might play out and China’s zero-COVID strategy resulting in further lockdowns and likely supply chain issues have been in focus. The combination of a risk-off move and significant downward pressure on the yuan saw the NZD break below 0.66 and it is currently just above that mark, down 1.2% from Friday’s NZ close. With USD strength pervasive, most other majors have been as weak, if not weaker. Bonds have been a beneficiary of the selling pressure in equities, with the US 10-year rate down to 2.81%, some 14bps below the level at the NZ close on Friday.

BNZ Markets Today

There has been plenty of central bank-speak since the NZ close and more hawkish commentary out of Europe has seen a front end-led sell-off in global bond markets. European 10-year rates are up 7-10bps, with 2-year rates up near 15bps. The US 10-year rate revisited 2.95% and is currently up 8bps for the day to 2.92%. Weaker risk appetite has seen commodity currencies underperform, with the NZD and AUD down in the order of 0.9% overnight. Selling pressure in JPY looks to have been exhausted, managing to hold its ground despite the big lift in global rates.

BNZ Markets Today

The past 24 hours have seen a reversal of recent market trends, with global rates falling sharply and the USD broadly weaker. The US 10-year rate, which made a charge for 3% yesterday afternoon, is back to around 2.85%. USD/JPY is back below 128 while the NZD is up around 1% to 0.68. While most equity markets are higher overnight, the NASDAQ is lower, weighed down by a 35% fall in Netflix. NZ CPI takes centre stage this morning, with annual headline inflation expected to reach around 7%. Fed Chair Powell is speaking tonight.

BNZ Markets Today

Global rates continue their relentless trend higher. The US 10-year rate is closing in on 3% while the 10-year real yield approaching 0%. As US rates march higher, USD/JPY continues to explode to the upside, with the currency pair hitting a fresh 20-year high of around 128.90 overnight. Movements in other currencies have been more restrained and the NZD has consolidated above 0.6720 overnight. Meanwhile, US equity markets have rebounded from their falls over the long weekend as earnings season kicks into gear.

BNZ Markets Today

The great global bond sell-off has resumed over the long weekend, with the US 10-year rate hitting a fresh cycle high of 2.88%. NY Fed President Williams has cemented expectations for a 50bps hike next month by saying such a move was “a very reasonable option ” while oil prices have increased sharply on supply concerns, adding to inflationary concerns and boosting bond yields. The USD is broadly stronger against a backdrop of higher Fed rate hike expectations and softer risk appetite. USD/JPY has reached a new 20-year high, the EUR has fallen to a two-year low after the ECB failed to live up to elevated market expectations and the NZD has fallen back towards 0.67, its lowest level in eight weeks. An interview with RBNZ Governor Orr is released at 8am this morning.

BNZ Markets Today

Global rates have shown further signs of stabilising overnight on hopes that inflation may be close to peaking. The US 10-year Treasury rate has fallen to around 2.68%, helping to boost equity markets and driving a fall in the USD. Both the RBNZ and Bank of Canada have delivered 50bps rate hikes over the past 24 hours. Despite the 50bps hike, the RBNZ’s statement was seen as ‘dovish’ relative to very elevated market expectations and NZ rates and the NZD have fallen sharply, with the NZD/AUD cross hitting its lowest level in 18 months.

BNZ Markets Today

It’s been another volatile trading session overnight. US rates have fallen sharply after US core CPI surprised to the downside. The US 10-year rate is back to 2.72%, having traded as high as 2.83% yesterday afternoon. After opening higher, US equities are now lower on the day, despite speculation China could start easing lockdown restrictions. The NZD and AUD are stronger on the back of higher commodity prices. The RBNZ MPR takes place today with the market pricing around an 80% chance of a 50bps OCR hike.

BNZ Markets Today

Risk appetite is weaker as investors focus on increasing lockdowns in China and the relentless rise in longer term bond rates. Global equities are weaker and global 10-year rates have risen to fresh multi-year highs. Oil prices have fallen back below USD100 on weaker demand fears from China lockdowns, amid ongoing supply from Russia. Against that backdrop, commodity currencies and JPY have underperformed.

BNZ Markets Today

Newsflow was light on Friday but the great global bond market selloff continued, with the US 10-year rate reaching a fresh three-year high of 2.73%. The USD reached its highest level in nearly two years before ending the day flat. Against a backdrop of slightly weaker risk appetite, the NZD was the worst performer on Friday, down 0.6% for the day to just under 0.6850. The week ahead is a busy one, with policy updates from the RBNZ, Bank of Canada and ECB, as well as US CPI data.

BNZ Markets Today

After a modest pullback yesterday, global bond yields have resumed their upwards trend. The US 10-year yield is back near three-year highs at 2.66% amidst further curve steepening. Elsewhere, US equities have rebounded while the USD continues to edge closer to its recent highs. The NZD is hovering just below 0.69 this morning.

BNZ Markets Today

Global rates continue to head higher, with the US 10-year rate printing a fresh 3-year high overnight of 2.66%, although it has since drifted a little lower. Risk appetite remains cautious amidst the prospect of aggressive central bank tightening and with Shanghai in lockdown. Equity markets and oil prices are lower overnight while the NZD and AUD have both fallen. Yesterday saw a brutal move higher in domestic rates in illiquid trading conditions, as the global bond sell-off spilled over to New Zealand. The FOMC minutes released a short while ago flagged the prospect of 50bps hike(s) and relatively aggressive quantitative tightening by the Fed.

BNZ Markets Today

Global rates are significantly higher, driven by a number of factors including the hawkish pivot from the RBA, hawkish comments from the Fed’s Brainard, French political risk and the end of the ECB’s pandemic bond buying programme The US 10-year rate has hit a fresh high for the cycle just shy of 2.57%. Higher global rates have driven the yen weaker, while EUR is weak as the EU mulls fresh sanctions. The AUD has been the strongest performer over the past 24 hours, while the NZD is flat, after briefly breaking through 0.70.

BNZ Markets Today

Newsflow has been light to kick off the new week but risk sentiment continues to improve, with equity markets higher, led by the technology sector, and commodity currencies outperforming. The US 10-year rate is slightly higher, against a backdrop of lower European yields, seeing the euro underperform.

BNZ Markets Today

Another strong US employment report drove US short end rates higher on Friday, resulting in further curve flattening, seeing the 2s10s curve closing inverted for the first time this cycle. US equities remained unperturbed and closed modestly higher. Currency movements were modest Friday night, with the NZD ending the week around 0.6925.

BNZ Markets Today

It has been a fairly uneventful end to a historic trading quarter, with a slight risk-off feel. Equity markets have been on the soft side, while global rates are lower. Oil prices are lower after the US decision to release an unprecedented 180m barrels from its strategic reserve. Safe haven currencies have outperformed and the euro is also on the weak side. The NZD has pushed down to 0.6940.

BNZ Markets Today

There has been some consolidation in US bond yields and equities overnight, after their recent surge higher. In Europe, German inflation hit its highest level since at least the early 1990s, sending the German 2-year rate back into positive territory for the first time in almost eight years. The USD is broadly weaker over the past 24 hours, with the NZD pushing up to just below 0.70. Domestic rates were volatile again yesterday with curve flattening the key trend.

Milk Price Forecast Range Wide

Forecasting is difficult. After all, the future is unknown.

But that doesn’t mean we shouldn’t have a plan, a budget, or a guideline, to work off and inevitably adjust if – or when – new information suggests it is necessary.
We say this as the new dairy season gets underway and milk price forecasts attract the usual wave of attention, including Fonterra’s first forecast for the season ahead.

Last week, the co-operative put a wide, but realistic, range on its opening 2022/23 milk price forecast of $8.25 to $9.75 per kilogram of milksolids. On our calculations, the mid-point of $9.00 seems consistent with product prices (think GDT auction prices) easing somewhat from current levels but remaining elevated relative to long term averages through the season (assuming a mid-to-high 60s NZD/USD effective exchange rate).

Weathering The Elements

There has been a lot of focus on primary product prices of late. No wonder given recent strength. It is good news albeit driven by a range of factors from tight global supply, disrupted logistics and supply chains, to buoyant demand. While each product has had its own idiosyncrasies, prices have been generally high.