Of Growth, Balance, and Inflation
It is the last main data rush before Christmas this week. And a lot of it has potential to alter thoughts around the near outlook for monetary policy. Q3 GDP on Thursday is the focal point. We expect a flat result for the quarter’s growth but wary of the many moving parts that could cause surprise. Selected monthly price indexes will give guidance for Q4 CPI views while the latest net migration numbers will gain more attention given recent attention by the RBNZ and PM. There’s also updates on the balance of payments, card transactions, PMI, visitor numbers, and possibly housing. Big week.
BNZ Markets Today
US equity markets gained, and treasury yields retraced from an earlier move higher as investors look ahead to key data on the US labour market. The US dollar was broadly weaker, and the yen advanced to its strongest level since August following hawkish comments by Japanese policy makers. Oil prices were little changed after touching a five-month low earlier in the week with the market unconvinced that OPEC+ production will be sufficient to boost prices.
The market isn’t convinced of the RBNZ rate track. Ultimately, economic developments will inform on the way forward. Today’s trade data revealed a lot of volatility. The week’s remaining GDP component indicators will help finalise estimates for Q3 growth numbers to be released next week. There are also some fiscal updates and commodity price news to monitor.
In with the new…
With the installation of the ACT/New Zealand First/National coalition government, and confirmation of its policy settings, we thought it worthwhile providing a brief overview of our thoughts as to the likely financial market and wider economic implications of the changes afoot.
November MPS Preview
Financial markets are now pricing three cash rate cuts in 2024. We’re not convinced the RBNZ is ready for this. There may be some push back when it releases its November Monetary Policy Statement. That said, inflation and the labour market are moving in the “right” direction and faster than the Bank had expected. This too needs to be acknowledged with a stance that may well be a tad more dovish than the Bank’s August missive.
Growth Struggles; New Inflation Series Awaited
Evidence continues to mount that the NZ economy is struggling to grow. The PMI has gone from bad to worse, while the PSI has slipped back into contraction. Softer activity appears to be feeding back into labour market outcomes. This week brings some new monthly inflation series. It is not a monthly CPI, but the new data will provide monthly guidance on more components of the (still) quarterly CPI. They have the potential to influence near term CPI forecasts.
Waiting for policy
The election results are in. New Zealand now has a National-led government. But it will need the support of both NZ First and ACT. It will take a few days to sort the exact shape of the government and its policy mix but the broad thrust of where the triumvirate will head is known and described herein.
BNZ Markets Today
Ahead of the Fed announcement this morning, the US 10-year rate fell 12bps to 4.8%, with Treasury looking to slow the pace of increase in long-term debt issuance and a soft ISM manufacturing print further supported the market. There was little reaction to the Fed’s on-hold rates decision. NZ labour market data drove lower rates and an NZD, but the currency reaction reversed overnight.
Labour Market Migrating Toward a Better Balance
There is a lot to suggest New Zealand’s jobs market is moving towards a better balance and that this will become more obvious as time wears on. That said, Wednesday’s Q3 labour market reports seem more likely to show a gradual rate of cooling, rather than anything dramatic at this stage. With this, we expect wage inflation to be forming a clearer peak.
The cost of insurance is rising, rapidly. Higher insurance costs for the likes of dwellings, contents, and vehicles were noticeable in last week’s CPI data, even though overall headline inflation came in under expectations. Insurance price movements potentially reflect inflation as well as relative price shifts. Distinguishing between the two is important for the central bank. Regards data this week, we wonder if consumer confidence will show any extra spring lift, and post-election.
It’s not over yet?!
National/ACT is the new government on election night but there’s a good chance NZ First is needed post the counting of special votes. Whatever the exact shape of the new mob, we think the likely policy mix is unlikely to change the behaviours of the RBNZ. With growing evidence of a weak(ening) economy and inflation trending lower we still think rates are on hold.
Changing the guard?
This week will mark the end to a single party government in New Zealand. Goodness knows what we will end up with but one thing’s for sure, it’s going to take some time before we ascertain the policy mix of the new regime. In the interim we expect upcoming data to confirm that the economy is moribund. The good news is this will help dampen inflation as will the recent decline in oil prices and RBNZ CPI weightings revisions.
The RBNZ’s Monetary Policy Review on Wednesday takes centre stage this week. We think the RBNZ will hold the OCR at 5.50%, as it delivers its one-page missive and record of meeting at 2pm. As we detailed in last week’s preview, we see this course of action as the balance of many competing forces and uncertainties.
RBNZ October MPR Preview
Labour market pressures are dissipating and the economy looks unlikely to build any momentum for some time. This suggests the Reserve Bank should be adopting a more relaxed stance than is currently the case. On the other hand, near term CPI inflation will surprise to the upside and the housing market appears to be turning more rapidly than the RBNZ expected. This argues for a tighter monetary policy stance. With such competing tensions, and the uncertainties surrounding the upcoming election, we think the Bank would be best advised to play a straight bat, acknowledge the risks that pervade but produce a steady as you go conclusion.
A Bounce… Along The Bottom
Thursday’s GDP figures headline this week’s economic schedule. Should the economy post a rebound in activity in these figures for Q2 – as we think it will – it will no doubt encourage discussion and commentary of the country bouncing out of recession. While that would be technically true, we see it has growth bouncing along the bottom. We see annual growth slowing to 1.3% in Q2 and then to about zero in the coming quarters. The latest PMI and PSI results are consistent with growth struggling into the second half of 2023.