The Arbitrariness of Self-Imposed Targets
- 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
- 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
- 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
- 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
- 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.
Peeking into Q3 GDP and CPI
- We estimate Q2 GDP lifted 0.8% (2.5% y/y)
- 0.1 under RBNZ/Treasury expectations
- August ECT leave likelihood of Q3 retail fall
- But as hangover to sports-mad Q2
- Awaiting Sept. consumer conf., August PMI
- While August FPI to fill in on CPI inflation
Broadening attention to the total ECT result, its 0.6% increase simply reversed the percentage fall it registered in July. This makes it even more likely that Q3 retail volumes will ease back (we are picking -0.6%). If all of this sounds disconcerting, it shouldn’t. Importantly, it needs to be viewed in the context of the outsized jump we saw in retail volumes in Q2, of 2.0%, which was no doubt boosted by sports events. It was no surprise, in this vein, that the hospitality component of the monthly ECT continued to abate in August, having spiked 2.1% in June.
Economy Chugging into Political Fog
Going into this week’s trifecta of Q2 GDP indicators, we estimate a production-based increase of 0.9% (2.6% y/y). As it happens, this is also what the Reserve Bank, in its August Monetary Policy Statement (MPS), expected, as did Treasury in its pre-election Economic and Fiscal Update. That said, we sense Q2 GDP growth could quite conceivably be 1.0% or more (our expenditure-GDP growth estimate for Q2 is presently +1.4%, as a cross-check).
BNZ Markets Outlook
A strong support to the NZ economy over recent years has been a high terms of trade. That is, the ratio of export prices to import prices. The terms of trade ultimately determine how many imports can be bought for a given amount of exports; an increase represents a lift in purchasing power. The terms of trade have been trending higher over recent years boosting national income in the process and supporting all manner of things like saving, demand, growth and the external and fiscal accounts.
BNZ Markets Outlook
Generally speaking, this Wednesday’s PREFU will be a platform for the government to reiterate its Budget initiatives – including the significant Family Incomes Package planned to start 1 April 2018 – but also an opportunity for opposition parties to say how they will manage the surpluses differently. With respect to outcome of next month’s election, while the polls have been lurching around – with a noticeable resurgence in support for the Labour Party – the central message, for the most part, remains the same. Neither National nor Labour are looking likely to command a majority in the House. New Zealand First, meanwhile, is increasingly laying claim to the balance of power and the pundits are increasingly split as to which way it will go.
BNZ Markets Outlook
This morning’s Q2 retail sales were very strong and well ahead of market (and our) expectations. The massive 2.0% quarterly lift in seasonally adjusted sales volumes were clearly boosted by sports events like the British and Irish Lions’ rugby tour (mainly in June) and NZ hosting the World Masters Games (in April). But there was a bit more to it than that.
BNZ Markets Outlook - RBNZ To Hold
Thursday’s RBNZ Monetary Policy Statement (MPS) sits head and shoulders above anything else on the local calendar in the coming week. We expect no change in the OCR, but there is a lot to consider.
Could The RBNZ Ease?
A purely mechanistic approach to monetary policy would now argue for a cut in New Zealand’s cash rate. At the time of the May Monetary Policy Statement, RBNZ spokespeople were clear in their message that there was an equal chance of a rate cut as a rate hike. Since that time the balance of economic data that we have received suggests that the RBNZ should be lowering its CPI inflation forecasts to levels that are not only well below the mid-point of the RBNZ’s target band but staying there for some time.
BNZ Markets Outlook
Even with signs that the NZ economy continues to perform relatively well, the prospect of slowing CPI inflation, aided and abetted by a cooling in the housing market, will only feed the reserved stance that the Reserve Bank reiterated last month. This is something for international punters to take most note of, even though the broader argument for rate hikes remains valid in our view.