Seasonal Adjustment
New Zealand’s services sector experienced a decrease in expansion levels during June, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Autumn Tinge
New Zealand’s level of manufacturing expansion experienced a dip in June, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).
Dairy Prices Drop
Dairy prices slumped at the GDT auction overnight. There are many factors in play including a usual downward seasonal influence as GDT volumes rise. It is still early days in the dairy season, but there is now downside risk on prevailing milk price forecasts. There are some clear negatives circulating, but not all indicators are pointing downward with a lower NZD and recently underwhelming world milk supply growth chief among those on the price supportive side.
Outlook for Borrowers: Post-June OCR Review
At the June OCR Review, the RBNZ kept the OCR on hold at 1.75%, as universally expected. There were some subtle changes in language however. The RBNZ said the OCR will remain at 1.75% “for now”, in the May MPS the wording used was “for some time”. The RBNZ also said the next move could be a rate cut or rate hike, but removed the previous reference to the risks being equally balanced.
RBNZ Will Move Rates Sooner
The RBNZ is closer to moving interest rates. That is the key message from today’s OCR review. What is less clear is in what direction. Be that as it may, we stick with our view that the cash rate is more likely to rise than fall and that the Reserve Bank will be bringing forward that rate hike, from its previously published early - 2020, in due course.
Easing Talk Premature As Confidence Slumps
A number of the indicators in today’s ANZ Survey have slipped to levels not seen since the global financial crisis. Unsurprisingly, this has got a number of folk talking about the prospect of near–term rate cuts in New Zealand. But we still think that such talk is premature, as CPI inflation is set to move back to the mid-point of the RBNZ’s target range within six months.
GDP Underdone and Understated
We see these figures as being ”the first leg of the double”. For some time now we have been pushing the view that GDP would surprise the RBNZ to the downside while CPI inflation would surprise to the up. GDP was lower than both RBNZ and Treasury assumptions. But we still forecast Q2 CPI inflation of 0.6% compared with the central bank’s 0.4% pick. On this basis, we caution market participants against getting too dovish on future RBNZ actions based on misses in real economy outcomes.
Not So Positive
This morning’s Balance of Payments (BOP) headlines were about as non-threatening as they were anticipated to be. The year to March 2018 current account deficit printed at $7.9b, or 2.8% of GDP – exactly in line with market expectations (and ours). But the undercurrents suggest an expanding deficit is in train – the degree to which is worth keeping a tab on.
Order Up
A lift in new orders/business contributed to New Zealand’s services sector experiencing a lift in expansion levels in May, according to the BNZ - BusinessNZ Performance of Services Index (PSI).
Q1 GDP Preview – Downside Risks
For a good while now, we have been wary about how this year’s Q1 GDP will go. We remain so. The reasons for this still stick out. And moribund business confidence and cooled consumer sentiment, since the change in government, obviously haven’t helped.
When Further Below Par Is Not Good
Moving further below par is great if you’re a golfer. But not if you’re a business survey of expectations, like the one updated by the ANZ bank this afternoon. Its net confidence measure slipped back to -27 in May, from -23 in April. Of course, these ongoing struggles in confidence don’t mean the economy is going to underperform. But the survey’s own-activity expectations do. They have a far better correlation to GDP growth. And in May they slipped to +14, from +19. This was further south of the norm, of +28. Fore!
Macroeconomic Risks From NZ Cattle Disease
The economic risks associated with cow-disease Mycoplasma bovis are rising. The Government plans to cull 152,000 cows to try and eradicate the disease, equivalent to around 1.5% of NZ’s total cattle population. This will affect production. Costs are rising and much uncertainty remains. Restricted movement of animals will dent industry efficiency and productivity. Downside economic risks need monitoring.
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!
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.