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.
Those Annoying Headline Grabbers
- Q2 CPI likely to “disappoint” with 0.1% (1.8% y/y)
- As the May MPS expected 0.3%, 2.1% annual
- But core inflation probably firming like the economy
- June PSI (58.6) strong like the PMI (56.2)
- Migration, tourism, dairy price info later this week
- Bascand’s talk; more financial than monetary policy?
Locally this week the focus turns to tomorrow’s Q2 CPI outturn. We expect a soft result of 0.1% q/q and 1.8% y/y (below the RBNZ’s pick back in May of 2.1% y/y, which didn’t have the benefit of knowing the recent tumble in oil prices). A soft result would support our view that the RBNZ isn’t likely to do an about-turn like the Bank of Canada recently did. We see the data reinforcing the RBNZ’s decisively neutral policy stance for some time. If anything, inflation is tracking below its projections, given the combination of a stronger NZD and lower oil prices.
Inflation Moderates Again
- Construction constraints will adversely impact manufacturers
- Tourism constraints to intensify
- Consumer confidence buoyant
- House price inflation to moderate further
- Food price jump offset by petrol price fall
We are forecasting next week’s Consumers Price Index to rise just 0.1% over the June quarter which will result in annual inflation nudging below the magical 2.0% mark to just 1.8%. This is lower than the 0.3%/2.1% combo that the Reserve Bank had in its May Monetary Policy Statement (MPS), largely due to the recent slump in petrol prices.
Leading From the Front
- BCA reckons RBNZ in the group to hike next
- Which tomorrow's QSBO is likely to reinforce
- Especially with its messages of capacity constraint
- But the RBNZ looks set to keep OCR at record low
- Credit, QVNZ, commodity prices, Crown accounts due
- But also watch for Barfoot's June housing results
As much as the RBNZ looks set in a holding pattern, we have the likes of heavyweight research house, BCA, putting the NZ central bank in the group most likely to hike next. While this doesn’t infer any immediate move, it is a collective that includes the Bank of Canada, which is now (rather suddenly) expected by the market to hike later this month. While we have a lot of sympathy with the BCA view – and representative, as it is, of some global views currently affecting NZ markets – we just as surely point out that the RBNZ would appear unconvinced.
Capacity, Commodities and Construction
- Businesses still upbeat?
- As capacity issues press
- Oil to dent near term inflation
- And add to already strong terms of trade
- May exports expected higher
- Building consents to bounce in May?
Data releases in New Zealand are relatively sparse this week. But what is on offer will provide more fodder to contemplate the growth and inflation implications of three important current themes namely capacity constraints, commodity price movements and construction activity.
Steady As She Goes
- RBNZ to reiterate steadiness at OCR review
- As positives and negatives weighed
- Our Feb-hike call looking too soon?
- Even with OCR presently half its neutral level?
- PSI/PMI each signal above-trend growth
We expect that the Reserve Bank will stick with its steady-as-she-goes tone at Thursday’s OCR review, while leaving its cash rate at a record low of 1.75%. To be sure, there has been some key news that the 11 May Monetary Policy Statement (MPS) hadn’t figured on. But the ups and the downs are probably offsetting in respect to OCR baselines.
NZ GDP Having Technical Issues
- We expect Q1 GDP expanded 0.5% (2.4% y/y)
- But expectations within a credibly wide range
- Capacity constraints coming to the fore
- External accounts a non-issue for Q1 and after
- May's (ECT) transactions clang with a 0.2% dip
- Also due this week: May's FPI, PMI (and REINZ?)
For Thursday’s March quarter GDP report we have toned down our growth expectation to a quarterly 0.5% (2.4% y/y). But we are at pains to point out the unusually wide range it could conceivably fall within. And this is not so much about the market range of 0.1 to 1.1%, with a median expectation of 0.7%. It’s more about the range of outcomes that we perceive as quite conceivable.
Q1 GDP Growth Looking More Moderate
- We prune our Q1 GDP pick to 0.6%, from 0.7%
- Wholesaling (like retailing) robust
- But Q1 building dip is a big, albeit once-off, weight
- Tomorrow's Q1 manufacturing might also disappoint
- Barfoot's data affirm slowing Auckland housing
- Commodity prices looking robust, still
A little bit like for Australia, there are question marks about how robust Q1 GDP will be in New Zealand as well. The negative from the Building Work Put in Place outweighs the positive from Wholesaling, such that we are today revising down our expectation for Q1 GDP growth to 0.6% (verging on 0.5%), from 0.7% (verging on 0.8%).
Our final call on Q1 GDP growth will depend, as usual, on the last statistical piece of the jigsaw, the quarterly manufacturing sales and inventory data. These are due tomorrow morning. We expect them to infer a strong bounce in manufacturing production, after weakness in Q4 that we judged as once-off.
Eyeing A Record
The NZ economy continues to perform well. The latest broad indicator will come via Wednesday’s ANZ business survey. While its confidence index moderated to about average in April, respondents maintained a strong outlook regarding their own activity, employment, investment and profitability. With this there have been signs of stretched capacity and a firming intent to raise prices. We haven’t seen anything in the past month or so to change this narrative, so we expect May’s edition of the business survey to reiterate these broad themes.