Markets Outlook

HYEFU/BPS to Shine a Light on Fiscal Path

Craig Ebert -
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- Robertson's speech contained nothing new
- HYEFU/BPS to illuminate fiscal policy/costing
- ECT/Paymark show spending spark in Nov/Dec
- Also due this week: Nov food prices and PMI
- Our Q3 GDP pick settled at 0.7% (2.5% y/y)

For fuller detail, and costing, on the new government’s new plans it is eyes down for Thursday’s Half-Year Economic and Fiscal Update (HYEFU). And it’s not just the HYEFU. There will be the accompanying Budget Policy Statement – for the government’s medium-term intentions, including on spending and debt – to scan, while the government is also supposed to be providing an update of its 100-day plan. With all of this we will, hopefully be better able to assess New Zealand’s fiscal (stimulus) outlook and its implication for the wider economy and financial markets.

New Zealand in Hot Water

Craig Ebert -
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- NZ sea temperatures unusually high
- Spencer’s talk on low inflation a scene setter
- Partials to test our 0.7% view on Q3 GDP
- Data to show housing stabilising?
- Commodity price updates also due this week

Grant Spencer’s speech tomorrow, entitled “Low inflation and its implications for monetary policy”, promises to be important, one way or another. In particular, it lends itself to an issue we’ve long been mulling. That is, there is reason to believe global inflation is being suppressed by structural, as distinct from cyclical, factors, which central banks have little to no influence over. Accepting this, is it prudent for central banks to keep aiming for the same old CPI inflation targets?

The Good (Old) Days

Craig Ebert -
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- Business/consumer confidence diverging
- Political poll largely unchanged
- Q3 terms of trade to surpass peak of 1973
- NZ GDP history revised up 2.2%
- RBNZ FSR to simply outline criteria for LVR exit
- And…it's dry before summer even begins

What we’re starting to notice is a divergence in business and consumer confidence, with the former sagging and the latter proving robust. This is probably no great surprise. Some of the policies being proposed by the new government will be a direct impost on the business sector for the sake of benefitting employees. Labour market policies are integral to this.

Rewriting Economic History

Craig Ebert -
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- Q3 retail sales likely to sport a hangover
- PSI (55.6) like PMI (57.2) robust to political flux
- Oct FPI leaves our Q4 CPI pick at 0.6% (2.1% y/y)
- Friday's migration figures to confirm further fall?
- We view Oct exports/imports bigger than market
- Annual accounts set to revise up GDP

So what about September quarter retail trade? The market’s median expectation is for a 0.1% increase in volume. We expect a real drop of 1.0%. With this there is scope to think spending by NZ consumers has been severely rattled, perhaps with reference to the election and such things as weak turnover in the housing market. But we would sniff at any weakness in Q3 retail volumes as largely a hangover, from turnover in Q2 over-egged by major sports events that New Zealand hosted.

Nominally Important

Craig Ebert -
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- Q3 GDP growth might struggle for 0.7%
- But CPI still set to exceed RBNZ expectations
- So can HYEFU sustain its nominal GDP forecasts?
- Q3 PPIs to slow on terms of trade peak
- Concrete and REINZ data of RBNZ interest
- Will politics spook Friday's Oct. PMI?

Last week’s RBNZ Monetary Policy Statement (MPS) has given us a well-defined reference point, but also a lot to chew on. Even with the Bank’s firmer outlook on CPI inflation we still believe there is potential for upside surprise on this, for instance. For today, however, we want to tease out a couple of points – in accordance with the bits of NZ data due this week – that relate to September quarter GDP and the housing market, including construction.

Time for Normalisation?

Stephen Toplis -
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- Time to drop policy neutrality
- Inflationary pressures are rising
- NZD weakness key
- Potential PTA and RBNZ Act changes no cause for inaction
- But general level of policy uncertainty a credible excuse

It is our strong view that the RBNZ needs to adopt a formal tightening bias when it releases its November Monetary Policy Statement this Thursday. It should probably back this up by moving its first published tightening forward from December 2019 to earlier in the year. But while we would strongly recommend this course of action we would not be especially critical of the Bank if it, instead, hid behind the wall of confusion that currently surrounds it for a while longer.

Change Brings Costs and Opportunities

Craig Ebert -
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- December's EFU crunch time for policy costing
- November MPS will surely forecast higher inflation
- Should the RB Act embed financial stability as well?
- Q3 pay-equity deal to start LCI on inflationary course
- Current NZ data hard to read around the election

We are certainly eager to see the full costing of the new coalition government’s policies. Of course, the Labour party was up front about its policy platform meaning for $7b more net core Crown debt by 2020/21 (and more than $11b more by 2021/22), compared to the pre-election EFU. It will be interesting to see if the new government can hold close to that. But, as people are asking, we suggest there is upside, possibly quite a bit. This suggests potential for the bond programme to be revised that much higher as a consequence.

Similar Growth, More Inflation?

Craig Ebert -
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- Awaiting the full policies of the new government
- Net growth impacts moot but reinforcing for inflation
- Suggesting RBNZ can’t/won’t be more relaxed
- Immigration already abating
- Merchandise trade the main NZ data this week

Now that we know the shape of the next NZ government we await the full policy prescriptions that stem from it. From “the partials” we’ve seen and heard to date, the net implications for GDP growth are open for debate (including around the details of what will effectively replace the 1 April “tax cuts” that are to be cancelled). But the indicated new policies do look likely to reinforce the upside we expect around inflation.

The Arbitrariness of Self-Imposed Targets

Craig Ebert -
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- CPI likely stronger than the RBNZ thought
- In Q3, Q4, Q1 (and beyond?)
- PSI (56.0) like PMI (57.5) robust to election doubt
- With declaration of govt. expected (early?) this week
- Dairy price slippage likely not just Golden Week
- Migration still falling in September?

The Reserve Bank, in its August Monetary Policy Statement (MPS), anticipated the Q3 CPI to increase 0.2%, for the annual rate of inflation to ease to 1.6%, from 1.7%. That looks too low-ball to us. In fact, we think it will mark the start of the CPI proving higher than the RBNZ expected for not just Q3, but right the way into early 2018. Recall that the August MPS forecast annual CPI inflation to drop away to 0.7% during the March quarter of 2018. We forecast it to hold up around 1.5%

Laboured NZ First Negotiations of National Importance

Stephen Toplis -
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- NZ Government announced Thursday?
- Migration outcomes of great interest
- Retail spending and housing moderating
- Manufacturing battles on
- More food for thought on inflation

The final votes are in and, as expected, both the Green
and Labour Parties picked up an extra seat at the expense
of National losing two. At the margin, this increases the
likelihood that New Zealand First can form a Government
with the Left, as the combined total of seats in the House,
under a Greens-Labour-NZ First coalition would be 63 – a
much more workable majority (in a 120 seat parliament)
than the 61 delivered on election night. But this is only a
small shift. The final outcome still depends on whether
New Zealand First decides to lean left or right.

Businesses Don’t Like Uncertainty

Stephen Toplis -
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- QSBO to be impacted by political shenanigans
- Inflation indicators unlikely to be worrying
- Economic momentum still positive
- Further fiscal easing supported by crown accounts
- And commodity price gains furthered

Businesses don’t like uncertainty. And that’s what they have now, as we await the shape of the new Government. It was an uncertainty that was developing in the run up to the General Election as the polls moved hither and thither. That’s why the ANZ’s business confidence indicators took a reasonable dip in its September survey. Tuesday we get NZIER’s Quarterly Survey of Business Opinion (QSBO). We expect more of the same.

Politics Won’t Derail the Expansion

Stephen Toplis -
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- Election over but we’re none-the wiser
- NZ First in the box seat
- But don’t discount the priorities of the Labour and National leadership
- Labour Government would, relatively, put modest upward pressure on rates
- RBNZ on hold

Saturday’s General Election outcome has little impact for financial markets mainly because we still don’t know who the Government is. That said, a Labour-Greens Government has been all but ruled out and that was the outcome most likely to cause market volatility.

Q2 GDP Growth Likely Solid, Weak and Massive

Craig Ebert -
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- We expect Q2 GDP lifted 0.8% (2.5% y/y)
- Per capita growth weak, nominal huge
- PSI/PMI suggest annual GDP growth of 3-4%
- Dairy prices still consolidating recent gains
- Party night Saturday…but which one(s)?

Our Q2 GDP expectation infers next to no growth in per capita terms. This is considering the working-age population expanded 2.4% in the year to Q2 2017 – boosted, as it has been, by record high net inward migration. However, Thursday’s NZ GDP report also needs to be assessed in the context of nominal growth – which we believe will hit a cracking 8% in Q2 – reflecting the terms-of-trade related flush of commodity income starting to course through the economy. So take your pick.