Fiscally Sound But Risks Building
The New Zealand fiscal situation still looks very sound. But the Government is being blessed with good fortune as tax revenues continue to push ahead of expectations. While we see no reason for significant criticism of what is being delivered we, equally, warn that things will get much harder for Government from here on in.
What Will Fonterra Forecast?
Today’s dairy auction result was a solid one ahead of Fonterra’s first forecast for the 2018/19 season. Dairy prices look that much better in the context of a falling NZD over recent weeks that has boosted NZ dollar denominated dairy prices. It sets the scene for a firm opening forecast for the 2018/19 season from Fonterra. We suspect financial markets would take a mid-$6 to $7 figure in its stride.
Returning To Norm
New Zealand’s services sector returned to expansion levels seen during the start of the year, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
BNZ PMI - Boom!
The Performance of Manufacturing Index (PMI) looked a bit weak early in 2018, especially in comparison to its hearty pulse through 2017. We thought, at the time, the early-2018 slowdown may prove temporary – a view strongly supported by April’s hefty result. April’s PMI punched up to 58.9 from (an upwardly revised) 53.1 in March. It’s a move from so-so to outright strong. Of course, we wouldn’t want to over interpret one month’s result especially as it may have been, in part, artificially boosted by the timing of Easter. But, in the least, April’s result suggests the economy has not fallen off the rails (despite negative business confidence as measured in other surveys). And there’s a positive future signal in the PMI new orders index being back above 60 and well in excess of the inventory index. It all points to decent growth in Q2, after a soft Q1 for the manufacturing sector.
Clarity Defines Orr Debut
The defining feature of Adrian Orr’s first Monetary Policy Statement (MPS) is the clarity of the message. Instead of having to flounder through screeds of mumblings to find out what the Bank really thinks, the message is up front. Symptomatic of this is the very first paragraph in the policy assessment which states: “The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down”.
RBNZ Preview: Out with the old, in with the old
Currently the market has New Zealand’s first rate hike fully priced in for the June 2019 OCR review. We’ve formally got February in our forecast track but, realistically, we are equivocating between February and May. On this basis, and, given what we think the RBNZ will say next Thursday, we believe minimal market reaction will be the order of the day. The risk is that market players read too much into any small changes in substance, or style, resulting in an unwarranted reaction.
Which Wage Information to Trust?
At face value, today’s slower Q1 Labour Cost Index (LCI) muddies the water on New Zealand’s inflation pulse – much like the recent slowing in annual headline CPI inflation has done. This feeds the idea of delay in respect to any policy tightening from the RBNZ. Yet we wouldn’t want to be dictated to by recent LCI (and CPI) prints, in this respect. Ultimately, it’s about looking forward. And considering wage measures other than the headline LCI would also present a more robust picture, in our view.
Lift In Service
New Zealand’s services sector experienced a lift in expansion levels during March, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
New Zealand’s level of manufacturing expansion decreased further in March,
according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
QSBO Gets a Grip
In summary, today’s QSBO was very close to what we expected. While there was potential for it to look a bit better, because it doesn’t cover farmers (who are currently gloomy in their general outlook), it also seemed prone to the negative global rhetoric around trade, along with the recent market volatility. As it turned out, business sentiment found a floor, while its activity expectations were reasonable enough to suggest maintained pressure on resources.
BNZ Economy Watch - Deliberating Dairy
Fonterra has lifted its milk price forecast for 2017/18 to $6.55 and so have we. This follows from generally higher international prices and a relatively stable NZD during 2018. We expect global dairy prices to drift lower in 2018, but downside risks have moderated with a higher Euro, higher oil prices, and robust dairy demand. Reflecting this, we lift our 2018/19 milk price forecast to $6.10. But with wide error bounds around any season-ahead milk price forecast, we look at some alternative scenarios.
Fed Hyperactive as RBNZ Hibernates
We still think that the cash rate will increase in advance of the RBNZ’s expectations but there was nothing in today’s OCR review to suggest that the Bank is moving in that direction.
When No Inflation Is Good Inflation
Ultimately inflation targeting is an intermediate objective. The ultimate role of monetary policy is to assist in creating an environment which maximizes the long term well-being of a country’s citizens. Removing, rather than creating, economic distortions must surely be a means to achieving this outcome. With this in mind we are hopeful that the new incoming Governor will take a more pragmatic stance to central banking than his predecessor and, in particular, be more openly aware of the ultimate goals of monetary policy rather than inflation targeting simply for inflation targeting’s sake.
US FOMC Preview – Data Supports a Hawkish Fed
US FOMC Preview – Data Supports a Hawkish Fed
New Zealand’s services sector experienced a slight slip in expansion levels during February, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
New Zealand’s level of manufacturing expansion decreased slightly in February, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
NZ Growth Dip Of Little Concern
The New Zealand economy grew 0.6% through the fourth quarter of 2017. Compared with year earlier levels activity was up 2.9%. The quarterly outturn was modestly below expectations and resulted in a 30 pip fall in the NZD. In our opinion, the market response was probably unwarranted as: the data are very dated; the outcome was only 0.1% below that of the RBNZ’s expectations; and the figures are highly unlikely to result in any significant shift in forecasters’ views of the future.
Starting To Widen
New Zealand’s external accounts remain off the market’s radar. One reason is a relatively small current account deficit. Another is a shrinking net external liability ratio. We expect the current account deficit to widen ahead, but remain contained by historical standards.
A Toast to a Half-Filled Tumbler
If New Zealand’s business glass appeared drained after the news of the new government, it has arguably just been topped up to half full. At one level, today’s ANZ business outlook survey was encouraging. Its net confidence reading, in particular, rebounded to -19, from its prior result, of -38, back in December. At another level, however, it obviously remains clearly below par, and thus well south of where it was riding, going into September’s election.