In The Balance
To our way of thinking, there is not a strong case for the Reserve Bank cutting its cash rate even further at Wednesday’s Monetary Policy Statement. Be that as it may, we believe the OCR committee will feel the case for another rate cut is finely balanced. And we think that, after vigorous debate, it will err on the side of a 25 basis point cut (to 0.75%), while maintaining a slight easing bias. This is mainly as the committee remains nervous about GDP growth not being as strong as it forecast in August, and all that that entails for its inflation and employment projections.
Eyes On The Labour Market
Domestic focus this week will be centered fair and square on Wednesday’s plethora of labour market data. With financial markets undecided and twitchy on whether the RBNZ will cut the OCR again next week, each piece of incoming data is getting analysed to the third degree.
A Break in Transmission
If the Reserve Bank’s “stimulus” is to work, it needs to do so besides injecting more froth into house prices. Absent a material improvement in the business surveys, it’s hard to see the economy expanding as robustly as the RBNZ thinks it will. This couches our view that the Bank will feel the need to keep cutting interest rates – even though it’s starting to sound less than committed to another cut next month.
The Manifestation of Strong Terms of Trade
Labouring as it is in general, NZ GDP still has many things going for it. Population growth is perhaps the most obvious, arithmetically speaking. But relatively strong terms of trade are also providing solid support to GDP – via the national income channel. Our Rural Wrap of last week picked up on this, in highlighting a lamb sector with serious tail winds, and an upgrade to our milk price forecast.
Differing Outlooks on All-Important Inflation
A good part of the surprise we think the Bank will get on the Q3 CPI will come in the non-tradables element. The August MPS figured on annual non-tradables inflation slowing to 2.7% in Q3 (from 2.8% in Q2) – on the assumption spare capacity is opening up in the economy – whereas we anticipate a pick-up to 3.0%.
GDP Growth Doesn’t Matter…Au Contraire
With near-term CPI inflation likely to overshoot RBNZ expectations, look for the Bank to emphasise slowing GDP growth as cause to keep cutting its cash rate. In this respect, we now anticipate 0.3% growth for Q3 GDP. And 0.5% for Q4 – with downside risk. Last week’s business surveys suggest we might still not be conservative enough, as they pointed to annual GDP growth heading down to the vicinity of 1%. This is miles below recent forecasts of the RBNZ (and Treasury).
Still Lacking Confidence?
We have been witnessing a general deterioration in economic growth indicators over recent months. It is this context that we get the latest gauges on business confidence this week. Neither survey is likely to make pretty reading. Confidence is likely to remain deeply negative. More signs of growth underwhelming are likely to encourage the RBNZ to act on its easing bias.
OCR Review: Taking Stock
In spite (or because?) of the Reserve Bank’s “shock” 50 point cut last time, we, like all and sundry, expect an unchanged OCR at this week’s meeting. So attention will presumably go straight to the Bank’s commentary, to see if it is still leaning the way of further easing down the track. We think this will be the case – and to a degree that won’t particularly jar with current market pricing.
GDP/OCR Preview: What’s To Stop The RBNZ Cutting?
We expect Thursday’s Q2 GDP figures will give a hint of the disappointment the RBNZ is likely to face as a medium-term proposition. With this, the Bank will probably feel under pressure to keep cutting its policy interest rate. Yet it also pays to think about what might stop the RBNZ along this inexorable path, if only temporarily. Like a still-tight labour market, strengthening CPI inflation, the weakening exchange rate, another flare up in the housing market, even global tides.
More Suggestion of Lessening Growth
It’s hard to know whether it’s still principally capacity problems, or weakening demand now coming in over the top. But the data are more and more questioning the pulse of New Zealand’s GDP. After this morning’s shaky manufacturing data we have pruned our pick on Q2 GDP growth to 0.3%.
Signs of Domestic Demand Weakness?
This morning’s June quarter Overseas Trade Indexes came in broadly as we expected…except for the greater weakness in import volumes than we imagined. Their 3.5% drop was not sheeted to lumpy items, instead reflected slippage in the range of core import categories. This piques our concern about how economic activity was travelling in Q2, and crucially with respect to elements of domestic demand.
BNZ Markets Outlook
We still struggle to see how yet-lower interest rates will transmit any durable stimulus to the economy, when interest rates are not perceived to be a key obstacle to growth in the first place. This is not from any model we are running, by the way, but from the vast majority of feedback we are getting directly from business audiences themselves.