Retail Spending Effectively Solid
If the New Zealand economy is suffering a lack of demand, consumers clearly haven’t received the memo. March quarter retail trade rose a seasonally adjusted 0.7%, in real terms. This was effectively a strong result, following the (unrevised) jump of 1.7% reported for Q4. The overall strength was evident in annual growth running at 3.3%.
Keeping head above water
New Zealand’s manufacturing sector experienced an increase in expansion for April, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
RBNZ Spooked By Growth
The RBNZ (and its new committee) has firmly nailed its colours to its mast. While we thought the balance of economic data would rail against a rate cut today, the RBNZ instead chose to focus on the economy’s downside risks in pushing through what is, effectively, a pre-emptive cut in rates. But not only did the Bank cut the cash rate today to 1.5% it also intimated a clear desire to give it another nudge lower.
Labour Softness Not A Rate Cut Portent
On balance then, we do not see overall labour market settings deviating substantially from full employment. Accordingly, while the pressure to raise interest rates is dissipating and the potential for a prospective rate cut is rising, we do not see sufficient softening in the labour market that, in and of itself, would demand the Reserve Bank provide any further stimulus any time soon.
Cost Pressure Remains
Business confidence remains mired in negative territory, as cost pressures remain intense. Growth is slowing, but the balance of inflation and employment indicators don’t look out of line with RBNZ targets.
Preview of Q1 Labour Market Data
With the financial markets still vacillating on an OCR cut for next week, this Wednesday’s labour market data could yet be a swing factor. Base case, we expect them to retain a decent degree of robustness. However, the risks seem tilted to the data appearing a bit mixed this quarter, even if just in a statistical sense. We saw from the Q1 CPI how markets react to this sort of thing. That is to say, aggressively.
CPI Slow But Firm Enough At Core
Just when the market was going off the idea of OCR cuts, along comes today’s March quarter CPI to excite the notion anew. To be sure, this latest CPI was slow. But its core measures arguably weren’t. All up, it leaves us on the fence regarding odds of an OCR cut at the 8 May Monetary Policy Statement (MPS), awaiting more direction from the data, and, more to the point, looking at the forward indicators. As of now, we still think the Bank will defer.
Activity in New Zealand’s services sector slipped to its lowest level since 2012, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
BNZ Markets Today
NZ: Food prices (m/m%), Mar: 0.5 vs. 0.4 prev.
CH: CPI (y/y%), Mar: 2.3 vs. 2.3 exp.
CH: PPI (y/y%), Mar: 0.4 vs. 0.4 exp.
US: PPI ex food and energy (y/y%), Mar: 2.4 vs. 2.4 exp.
US: Initial jobless claims (k), 1st Apr: 196 vs. 210 exp.
After the passing of a number of significant event risks yesterday, markets have returned to calm, with volatility subdued. The USD has strengthened across the board, taking the NZD down to its recent lows in the process. RBNZ Governor Adrian Orr gave an interview with Bloomberg late yesterday in which he said the May OCR decision would be a difficult one.
New Zealand’s manufacturing sector experienced decreased levels of expansion for March, according to the latest BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
QSBO Confirms RBNZ On Target
As much as our central view on activity and inflation remains unchanged we concede that we are millimetres away from formally moving our rate call to a cut. Not because we think it is justified by economic fundamentals but because it is hard to stand in the way of the freight train that is market pricing with the RBNZ guiding the locomotive from the cab. For now, though, we will stand fast and await the upcoming announcements on the Q1 CPI and labour market before finalizing our call for the Bank’s May response.
NZ Businesses Growing Tired of It
While we take on board today’s weak-looking business survey, we still think it’s important to understand what’s behind it. To the extent that it’s still capacity limits being encountered, next week’s NZIER Quarterly Survey for Business Opinion (QSBO) will give key insight.
RBNZ Doves Fly
While the door to a May rate cut may have been opened, we do not believe the evidence will be sufficient at that time to actually take the plunge. Unless we see weakness in the labour market or falling inflation we will rail against a May cut view albeit ever mindful that we do not see justification for the Bank’s current stance either.
NZ GDP Growth Near Trend
For some the data signals that the RBNZ should be rushing to lower interest rates. But the RBNZ does not target growth. It targets maximum sustainable employment and CPI inflation. Only if slower growth forebodes lower inflation and a higher unemployment rate would a cut be demanded. As things stand, there is no evidence of this.
Dairy Outlook Improving But Risks Remain
Dairy prices continue their ascent. Today’s 1.9% gain the GDT Price Index is the eighth consecutive increase and takes the cumulative gain to 26.2% since November last year. It is a material move higher as solid demand has bumped up against tightening global milk supply. We lift our milk price forecast for this season and next.
Upward Pressure On External Deficit Easing
New Zealand’s current account deficit widened to 3.7% of GDP for the year to December 2018 from 3.6% in the year to September 2018. This was not as big a deficit as the 3.9% expected by the market and us, although not a major surprise. Stabilising oil prices and higher dairy prices will help bring a smaller deficit in 2019.
Standard services resumes
New Zealand’s services sector returned to expansion levels experienced in recent months, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
RBNZ Not a RBA Disciple
As the market becomes increasingly dovish about Australia, investors seem very keen to assume that wherever Australia goes New Zealand will follow. While it is true there are close links between the two countries, monetary policy will only be replicated when economic conditions demand. Right here and now that is not the case.
Business Confidence Survey Unequivocally Soft
Over the last few months there have been numerous data releases that have delivered bob-each-way results for both doves and hawks alike. The same cannot be said of today’s data. While we are skeptical that the report accurately reflects the momentum and inflationary pressure in the economy, we have to concede that there’s a lot in it for those of a dovish disposition and very little for those of an opposite standing.