Outlook for Borrowers: Post August MPS
In the 10 August Monetary Policy Statement the RBNZ reiterated the policy guidance it has maintained all year, that “monetary policy will remain accommodative for a considerable period”.
RBNZ Aggressively On Hold
The RBNZ is stuck in neutral. Any increase in interest rates is seen as simply not plausible given that inflation continues to sit below the RBNZ’s target band mid-point. On the other hand, low (and, indeed, falling) inflation is not seen as sufficient to cut rates as (a) it’s seen as transitory and (b) the economy simply does not need any more stimulus at this juncture.
Working Through The Noise
There seems to remain a lot of noise in the official employment data making quarterly movements difficult to trust as an indicator of trend. We say this as today’s Household Labour Force Survey (HLFS) shows employment eased 0.2% in the second quarter of the year and the participation rate lurched lower from its record high. This saw employment come in well below market (and our) expectations, but the unemployment rate edge lower and match what was anticipated at 4.8%.
NZ Keeps On Keeping On
It has now been over six years since New Zealand last experienced a technical recession, and that was largely due to the fall-out from the Darfield earthquake. Before that, you have to go back to the GFC period of 2008/09. This represents a remarkably long period of expansion by historical standards and, importantly, one which looks set to be sustained for some time to come.
Zero Inflation
A soft CPI and a soft under-belly to the result suggest that the RBNZ won’t be in a hurry to join the ranks of other major central banks to remove policy accommodation. It anchors the short end of the rates curve around current levels and at least from a relative monetary policy perspective the Bank’s stance won’t be lending any support to the NZD.
Even Keel
New Zealand’s services sector stayed at a similar level of healthy expansion for June, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Steady Pace
New Zealand's manufacturing sector saw expansion continue to hover around expansion levels experienced over the last three months, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
QSBO Still Pressing On (And Then Some)
- Q2 QSBO about as robust as it was last quarter
- So firm on growth, capacity constraint and inflation
- No news for the RBNZ as such
- But QSBO misses the fiscal/commodity thrusts
- While resilient to the impending general election
There were some unders and overs in this morning’s NZIER Quarterly Survey of Business Opinion (QSBO). However, overall, it remained consistent with robust growth, capacity constraints, as well as firmness in inflation.
Central Banks Stir as RBNZ Hibernates
- RBNZ on hold for “considerable period”
- As BOC, BOE and Fed show signs of aggression
- We formally relinquish our Feb rate hike view
- As short term inflation indicators weaken
- Nonetheless, we remain mindful that capacity pressures continue to build
With some trepidation, we are now formally pushing back our expectation of a first RBNZ rate hike to mid-2018 from Q1 2018. There remains huge uncertainty around the timing of the move and we are certainly not ruling out a February rate hike. However, we now think looking for a May (or August) move is a better reflection of our central view of the RBNZ’s reaction function with equivalent risks of an earlier or later move. Our view remains significantly more aggressive than the central bank’s and modestly more so than market.
NZ Business Reality Trumps (Political) Uncertainty
- NZ businesses beefing up their optimism
- Despite the election and other supposed uncertainties
- Agriculture very much joining the party
- Capacity constraints are clearly biting
- Pricing gauges sustain 2%-plus inflation pulse
With the word “uncertainty” being bandied around a lot lately, and a local election fast approaching, the reality is that New Zealand’s business sector is full of confidence and expectation.
RBNZ Pleasingly Skirts a Dovish Tilt
- RBNZ leaves OCR at record low 1.75%
- And chary to the net-negative news since May
- NZD and wholesale rates little changed
- August MPS risks looking a little dovish
- But we leave our Feb hike call for now
- As capacity constraints pressure core inflation
As widely expected, the Reserve Bank of New Zealand left its policy interest rate unchanged at this morning’s OCR review, at a record low 1.75%. It also kept its language largely unchanged from last time. While we expected such a steady-as-she-goes approach, we did see a risk of the rhetoric tilting a fraction dovish, given the balance of news since the 11 May Monetary Policy Statement (MPS). But it didn’t, which we were pleased to see.
Outlook for Borrowers: Post June OCR Reveiew
- With expectations of unchanged monetary policy for some time, wholesale floating rates and short-dated wholesale fixed rates should remain fairly flat through the rest of the year. A slight upward bias prevails due to upward pressure on bank funding costs. Next year, the possibility of higher wholesale rates increases as the first expected policy tightening by the RBNZ approaches.
- For those looking to hedge against rising rates, we see current levels of mid-long curve wholesale fixed rates at relatively attractive levels to do so. Risks appeared skewed toward higher rates later in the year.
Back On Track
New Zealand’s services sector returned to its recent level of consistent and healthy expansion during May, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Sailing Along
New Zealand’s manufacturing sector saw expansion in activity lift during May, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
Slow Q1 GDP Doesn't Deny Demand Pressure Developing
- Real Q1 GDP slows to 0.5%, 2.5% y/y
- Encouraging the view of RBNZ reservation
- But nominal GDP running at 6.2% y/y
- Just as capacity constraints begin to bite
- And we add demand to our GDP forecasts
- Pressure remains in view, in other words
We are not down in the mouth about today’s reported 0.5% expansion in March quarter GDP. Yes, it under-clubbed market expectations of a 0.7% gain and was even further below the Reserve Bank expectation of a 0.9% lift. That being said, we expected Q1 GDP to be this slow, largely on technical/timing issues. More to the point, we still think the economy is fundamentally pressing on, but as its room to expand is diminishing, because of capacity constraints. Budget measures will add to demand pressures.
For Better Or Worse?
- Current account deficit unexpectedly widens
- But external accounts remain benign
- As net international liability position continues to shrink
- Nominal income growth looks strong
- But we have reservations for tomorrow’s real GDP
- Cyclone fueled food prices nudge our Q2 CPI pick higher
The annual current account deficit for the year to March 2017 was 3.1% of GDP. This was a bigger deficit than the 2.7% figure both the market and we expected and a push wider from the (upwardly revised) 2.8% result for calendar 2016.
Capacity Constrained!
- Fiscal stimulus to boost growth
- But capacity constraints are binding
- Lack of land, labour, physical capacity and finance will strangle growth
- And, potentially, raise inflation
- We’re optimistic but warn against overly ebullient growth expectations
New Zealand’s economic environment is probably unique in the developed world. Whereas many nations continue to fend off the fallout from a protracted downturn, New Zealand, instead, is suffering from speed wobbles. A softening in economic growth looks almost inevitable but not because demand is set to weaken but rather because the economy is rapidly running out of the inputs required to keep the expansion on track.
High Terms of Trade Data Not Without Hooks
There is a strong positive income pulse brewing in the NZ economy, courtesy of rising export prices and relatively subdued import prices. But this, being price driven, will not show up directly in quarterly real GDP figures that might well look a bit softer in the near term. We expect the terms of trade to remain elevated compared to history, while we judge the near-term volume weakness to be transitory.
The Politics of a Buoyant Business Sector
- May's business survey another strong one
- With inflation firming up squarely
- All pre the Budget's announced stimulus
- But beware election nerves creeping in hence
- RBNZ FSR telling of low-rate context
If New Zealand’s business sector is getting nervous about September’s general election, there was little sign of it in today’s ANZ business survey. Yes, net confidence – even with its 5 point increase in May, to +15 – is barely different to average, having been well above trend late last year. However, most every indicator regarding activity wriggled up, to a level further above trend. And the survey’s inflation gauges were now pointing to inflation of 2%, at least.
Government Has A Lot to Do With Pressure
Today’s Budget had a lot to do with pressure. Pressure to funnel some of surpluses back into the economy (in an election year); the pressure this will put on the economy’s resources, especially construction; all amid the ongoing pressure from a strongly growing population.
Commodity Winds are Now Tail Ones to Trade
After a rough December quarter, New Zealand’s merchandise exports look to be rebounding quite well this year, while imports are largely maintaining their good momentum. So were the messages of this morning’s April trade account. And today’s milk price announcements by Fonterra were a further reminder that the commodity sector is now providing tailwinds to the economy, after cross-winds last year.