May MPS Preview
We expect the Reserve Bank’s view of the world, as espoused in its upcoming Monetary Policy Statement, will be largely unchanged from what it said back in April. Sure, inflation has been higher than it had anticipated and risks of further near-term upside remain but growth is surprising to the low and unemployment to the high indicating that any near term inflationary issues should dissipate in time.
Softening Affirmed
Last week’s Q1 labour market data affirmed our view of a softening market, and we see further softening ahead. Understandably, the RBNZ gave no sense of material surprise to last week’s information. Inflation information and the Budget look the more important events on the local calendar to shape the Bank’s view.
Employment Outpaced?
We expect this week’s HLFS to show an increase in employment and unemployment. We think labour supply is expanding faster than labour demand such that we think the unemployment rate will rise. This will put downward pressure on wage inflation. This week’s business survey looks prone to some general softening, but will the pricing indicators follow others downward? RBNZ’s FSR is due Wednesday.
A Peak Into Next Week’s Labour Market Data
Next week’s labour market reports are the next domestic data focus. We think they will generally confirm softening in the labour market, although not substantially different from what the RBNZ anticipate. Data this week is expected to show the annual trade deficit continuing to narrow, while consumer confidence is expected to remain weak.
Plain miserable
The last seven days has produced a simply miserable set of real economy data which has us questioning whether our expectations for an end-year turnaround are premature. The only redeeming feature is that the economic weakness supports our expectation that inflation will continue to trend lower. Indeed, we have revised down our Q1 pick for CPI inflation, published this Wednesday, to 0.6% delivering an annual 3.9%. It’s still above the RBNZ’s pick but not enough to cause it any great worry.
RBNZ In Wait and Watch Mode
We expect the RBNZ to hold the OCR at 5.50% this week. In our opinion, the Bank could easily cut and paste the policy assessment it delivered back in February. No change is the unanimous view of those in market polls and is fully priced by the market. Datawise, Tuesday’s QSBO will be well worth a look. We expect the business survey to confirm slack in the labour market, but we also have interest in its near-term indicators for pricing, activity, employment, and investment. Friday’s March price indexes will complete their guidance for Q1 CPI.
RBNZ – Rinse and Repeat
Next Wednesday the RBNZ gives us its latest update on monetary settings. In our opinion, the Bank could easily cut and paste the policy assessment it delivered back in February. From a bigger picture perspective very little has changed: growth is moribund, the unemployment rate is rising, inflation and inflation expectations are trending lower. The job is not done because inflation still has some way to fall but current settings seem to be doing the job.
In Confidence
We are starting to feel that the trend increase in both business and consumer confidence is slowing. We look towards this week’s suite of indicators for evidence of this. Meanwhile, Wednesday’s Budget Policy Statement should highlight the deterioration in the nation’s fiscal accounts and, hopefully, provide insight into the government’s plans.
On the improve
Activity in New Zealand’s manufacturing sector continued to show improvement in February, but still remained in contraction, according to the latest BNZ – BusinessNZ Performance of Manufacturing Index (PMI).
The seasonally adjusted PMI for February was 49.3 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was up from 47.5 in January and the highest level of activity since February 2023. However, the sector has now been in contraction for 12 consecutive months.
BusinessNZ’s Director, Advocacy Catherine Beard said that the improved February result showed signs of a gradual turnaround in the sector.
“The key sub-index of Production (49.1) was at its highest level since January 2023, while Deliveries (51.4) was at its highest point since March 2023. However, New Orders (47.8) has now remained in contraction for nine consecutive months and likely needs to get much closer to the 50-point mark to edge the sector back into expansion".
The proportion of negative comments in February stood at 62%, which was down from 63.2% in January but up from 61% in December. A lack of orders (both domestic and offshore) was mentioned by many respondents, as well as the general slowdown in the economy.
BNZ’s Head of Research Stephen Toplis said that “New Zealand’s manufacturing sector is still in recession, but this month’s PMI indicates there is light at the end of the tunnel. The 49.3 reading is within a smidgen of “breakeven” and the new orders to inventory differential provides support for an increase in production. Moreover, New Zealand’s underperformance against the rest of the world is narrowing quickly”.
GDP going nowhere fast
We’ve settled on 0.1% for our Q4 GDP pick. But the data are very noisy at the moment so there is a huge margin of error around this projection. Whatever the exact number the conclusion will be the same, New Zealand economic growth has stalled and on a per capita basis it is going backwards at a rapid rate of knots.
Monitoring Growth, Or Lack Thereof
There is no top-tier data this week, but a collection of the remaining key indicators for Q4 GDP are worth watching. We are looking for them, collectively, to suggest that economic growth struggled in Q4. This morning’s data saw a substantial drop in the terms of trade – reflecting a material drop in the country’s purchasing power. A very large drop in import volumes suggests demand has slumped. But there was plenty else to ponder in today’s extremely volatile set of trade figures for Q4.
RBNZ To Aggressively Maintain Tight Conditions
RBNZ takes centre stage. It seems to us there is no need for the RBNZ to raise rates further. Monetary conditions are tight and doing the work. Whether the Reserve Bank sees things as we do is moot. Its rhetoric has certainly been extremely hawkish of late. We acknowledge there is still more of a chance the RBNZ lifts its cash rate on Wednesday than it lowers it. We expect the Bank to aggressively justify holding interest rates at current levels for an extended period.
RBNZ February MPS Preview
There’s more chance the RBNZ hikes than cuts when it delivers its February 28 Monetary Policy Statement. But we think a hike would be a policy error given the extent by which the labour market is easing, spare capacity is growing and inflation, both headline and core, is falling. So we are forecasting no change in the cash rate at the forthcoming meeting. Nonetheless, we also expect the RBNZ to be aggressive in its support for holding the cash rate at its currently contractionary level well into 2025.