Markets Outlook

A Climate for Fiscal Slippage

BNZ Research -

With today’s release of the momentous Emissions Reduction Plan (ERP) there might seem little of consequence left for Thursday’s Budget to account for. Yet there are still significant fiscal matters to understand. Like the delayed return to surplus that Finance Minister Robertson has admitted to when the tax take is running so far ahead of expectations. Like the lack of any operating surplus near-term, when the economy is so pumped up (implying a structural deficit is being brewed). Like the government’s spending-to-GDP target that didn’t seem to appear in the revamped fiscal rules.

This Ruddy Nominal Economy

BNZ Research -

There is a good smattering of NZ information on offer this week. However, the scene-setter will arguably be Thursday morning’s pre-Budget speech by Grant Robertson. With the Finance Minister already having admitted the return to fiscal surplus will be delayed a year (compared to December’s HYEFU forecasts) we are left wondering what has driven the postponement. If not because of downgraded macro-economic forecasts in next week’s Budget, it suggests some sort of fiscal stimulus is in the wings (something the RBNZ would be most interested in, no doubt).

With Omicron-Affected Labour Data, Watch Wages

BNZ Research -

While Wednesday’s Q1 labour market data could easily be messed up by Omicron, there’s little argument that New Zealand’s labour market is exceptionally tight. And, so, it pays to think about how much further nominal wage inflation will pick up on the back of this. We also recommend close attention be paid to Finance Minister Robertson’s pre-Budget speech, which kicks off Tuesday 7:30am (NZT).

Pressing On

BNZ Research -

It might have surprised many, including the RBNZ, that the Bank’s sectoral factor model estimate of inflation picked up to an annual pace of 4.2% in Q1, from 3.8% in Q4 (revised from 3.2%), and 2.0% at the outset of the pandemic. Then again, this is about what happened to it the last time New Zealand’s unemployment rate pressed below its equilibrium (NAIRU) level, over the 2003-07 economic cycle. In this sense, there is nothing especially unusual about the pick-up in core inflation rates we’re now seeing.

Sooner Not (Necessarily) More

BNZ Research -

Everyone, including the RBNZ, appreciates that Thursday’s Q1 CPI report will print stronger than the Bank’s last set of forecasts (the Feb MPS) anticipated. For more timely and broader context around monetary policy, there was parsing to do on Adrian Orr’s recorded interview (with the IMF), which was released first thing this morning. This made it clear the RBNZ is on a mission to contain inflation. But for every line of Orr’s that looked like a hawkish nudge there was another to give it some conditionality. The 50-point hike last week was an eye to doing things sooner, rather than (ultimately) more.

Confusion Still Reigns

Stephen Toplis -

We have no idea what, exactly, the RBNZ will do with the cash rate on Wednesday afternoon. The debate amongst financial market participants is whether the RBNZ will hike the rate 25 or 50 basis points. There are very sound arguments for either approach. At the margin, we think the case for 25 is more compelling but we do understand why the MPC members could conclude otherwise.

Confidence Key

BNZ Research -

Confidence, or the lack thereof, can be a key determinant in the performance of an economy. When consumers lack confidence they tend not to spend. When businesses lack confidence they don’t invest and they don’t hire. Recent past data have shown both business and consumer confidence coming under pressure. This week we get our next dose of sentiment reports from the ANZ. Wednesday sees the release of the Business Outlook while on Friday consumer confidence is delivered. We await these surveys with a great deal of interest as they play a significant roll not only in shaping our view of likely developments in the economy but also our expectations of the Reserve Bank reaction function to those developments.

Freedom (With a Small f)

BNZ Research -

New Zealand’s COVID-related restrictions are being done away with, even faster than our economic assessments can keep up with them. While these policy changes are generally positive for economic activity, there are many positives and negatives to weigh up, in judging their net impact on GDP. We are busy in our latest phase of re-estimations.

Soaring inflation elevates OCR expectations

BNZ Research -

There is now almost no doubt annual CPI inflation will surge through 7.0%. A number in excess of 8.0% is not out of the question. It seems we are raising our inflation forecasts on an almost daily basis as oil prices surge, food prices defy expectations and generalized cost pressures feed through into selling prices. This puts significant pressure on the RBNZ to raise interest rates aggressively but it’s not a one way bet that a 50 point OCR hike will be delivered in April.

Entering Choppy Waters (But for How Long?)

BNZ Research -

This week’s “partials” could well point to heftiness in GDP for Q4 2021. However, the market’s focus will be on the handful of economic reports for February that are due. These will provide insight into how the economy has been faring, amid the parabolic rise in COVID-19 case numbers in the month. This has suddenly forced the local populace to start to live with the virus, in a way it hasn’t had to, to date.

More inflation, less growth – nothing new

BNZ Research -

Omicron is now waging war on New Zealanders and the New Zealand economy. But there is, at long last, genuine light at the end of the tunnel. Meanwhile, as growth is attacked, inflationary pressures continue to rise and labour shortages go from bad to worse. The Omicron hit should be transitory but the price and labour market pressures look more long lasting, so the RBNZ will keep on tightening.

Filling the Gaps

BNZ Research -

For this week’s meeting, our central view is that the RBNZ will increase its cash rate 25 basis points, signal a higher terminal cash rate, and have an even firmer increase in rates through calendar 2022 than was published in the November 2021 MPS. For the most part, this will “meet the market”.