BNZ Research

Our research team offers expert commentary on economics, foreign exchange, fixed interest and credit, to help inform your organisation’s risk analysis and decision making. 

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Currency Research

NZD vs. Long-Term Fair Value Estimates

Jason Wong -
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- Over the last 12 months, the NZD has depreciated against most major currencies, including significant falls against EUR, GBP, and CAD. This has closed up some of the long-term currency misalignment as measured by our purchasing power parity estimates.

- On a TWI basis, the NZD is currently very close to our long-term PPP estimate, supporting RBNZ Acting Governor Spencer’s recent statement that the NZD was “closer to a sustainable level”.

- Our PPP estimates have no bearing on our 1-2 year ahead projections for the NZD, which are driven more by cyclical factors and short term considerations, but they do play a role in thinking about the longer term outlook. Corporates with a long-term focus, say 3-5 years ahead, should budget for lower NZD/EUR, NZD/GBP, NZD/JPY and NZD/CAD cross rates. Over a long-term horizon, NZD/USD is more likely to be higher than lower, while there is no strong opinion on the current NZD/AUD long-term assessment.

NZD Corporate FX Update

Jason Wong -
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The NZ election outcome has hastened the expected move to below USD0.70. The NZD looks a little oversold from domestic political forces, against the backdrop of very high risk appetite and the supportive global economic backdrop. But a deteriorating dairy price outlook and chance that risk appetite falls from here curb any enthusiasm for a decent recovery. We see modest downside risk to our 0.69-0.70 flat line projection through to end-2018.

NZD shocked by new government

Jason Wong -
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- Some “sticker shock” to the formation of a new NZ government has seen a weaker NZD. While a near-term cloud overhangs the NZD from domestic political forces until we have more detail on policy and portfolios, we expect the negative impulse to quickly fade.

- In a long-term historical context, NZ’s real exchange rate is high, but this can be easily explained by NZ’s strong terms of trade. The call by some commentators that the NZD is over-valued in this context is a value judgment, but supporting evidence is scant.

- We re-estimate our short term NZD/USD model with new data and come out with unchanged conclusions. With fair value around 0.73, the NZD is a little oversold. But the softer GDT dairy auction this week reminded us why we have the NZD tracking towards 0.69-70 over the next 3-6 months. The hue of the government has no bearing on this, with global forces in charge.

NZD: Rates a secondary force only

Jason Wong -
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- Central bank statements and expectations can kick around currencies over the very short term but we think other drivers are more important over the medium-term. Relationships between NZ-global rate spreads and the NZD have weakened over recent years.

- Risk appetite and commodity price trends are more important drivers of the NZD than interest rate differentials. Our monetary policy expectations don't have a significant bearing on our outlook for the NZD over the next year or two.

- High risk appetite - its highest level this year - supports the current level of the NZD. Our projections for a weaker NZD into year end and early next year assume that eventually risk appetite must surely fall from its giddy heights. A weaker commodity price dynamic is expected to give further weight to that view.

NZD Corporate FX Update

Jason Wong -
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The risk-loving environment provides near-term support for the NZD but our forecasts are predicated on this dynamic not lasting forever. A further Fed hike in December remains in our forecast, which supports a modest recovery in the USD and nudges the NZD down to 0.70 by year-end. The NZD is then projected to hover around that level through 2018.

NZD Corporate FX Update

Jason Wong -
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The risk-loving environment provides near-term support for the NZD but our forecasts are predicated on this dynamic not lasting forever. A further Fed hike in December remains in our forecast, which supports a modest recovery in the USD and nudges the NZD down to 0.70 by year-end. The NZD is then projected to hover around that level through 2018.

Economy Watch

When the Little Things Mean So Much

Craig Ebert -
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- 0.2% gain in Q3 retail effectively huge
- As it builds on Q2's sporting fillips
- But be careful in interpreting the regional data
- Retail inflation shaking its negativity
- Fiscal injection to households still to come

Statistics NZ this morning reported a 0.2% increase in September quarter retail trade volumes. At first blush this does not sound impressive, one little bit. But really it was, considering it followed a 1.8% jump in June quarter spending that was demonstrably boosted by New Zealand’s hosting of some major sporting events.

Performance of Services Index

Doug Steel -
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Activity in New Zealand’s services sector during October was largely on par with recent months, according to the BNZ - BusinessNZ Performance of Services Index (PSI). The PSI for October was 55.6, which was 0.3 points lower than September (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining). It was also the third time in four months that activity rested between 55-56 points. BusinessNZ chief executive Kirk Hope said that while the sector has shown consistent and healthy levels of expansion, it is slightly off the 56-58 values generally experienced in recent years. “Despite overall expansion not being quite in the same league as recent years, the proportion of posi¬tive comments for October (67.6%) experienced a noticeable lift from September (56.6%), with many outlining conditions being business as usual. Also, a number of negative comments continued to revolve around General Election uncertainly”. BNZ Senior Economist Doug Steel said that “these are robust results given the prevailing uncertainty surrounding the election, coalition negotiations, and government formation over the period. It was a similar story in last week’s equivalent for the manufacturing sector. It is a positive start for economic growth in the final quarter of the year”.

Performance of Manufacturing Index

Craig Ebert -
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Activity in New Zealand’s manufacturing sector during October remained within a fairly tight band of expansion over recent months, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI). The seasonally adjusted PMI for October was 57.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). While this was again 0.4 points lower than the previous month, the figure still represented very healthy and consistent levels of expansion. Overall, the sector has remained in expansion in all months since October 2012. BusinessNZ’s executive director for manufacturing Catherine Beard said that the fundamentals of the October result remained healthy. “The two main sub index values of production (60.7) and new orders (60.1) indicated strong expansion for October. Also, while the proportion of positive comments dipped in October (64.2%) compared with 69.5% in September, it was still similar to the 65% recorded in August. BNZ Senior Economist, Craig Ebert, said that “October’s result was certainly encouraging, as was September’s - bearing in mind the PMI is about the nuts and bolts of activity rather than sentiment about where things might be heading”.

Tiptoeing Through the Minefield

Stephen Toplis -
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- Cash rate unchanged at 1.75%
- But RBNZ becomes a trifle hawkish
- As inflation forecast raised
- And new government policies are embedded into forecasts
- We stick with our view that the cash rate will rise in 2018

As today’s statement was largely in line with our expectations, our forecast rate track is unchanged. We still believe inflationary pressures will prove higher than anticipated and that the Bank will end up raising interest rates in the second half of 2018 but, equally, we can understand that given the degree of uncertainty that prevails the Bank is not likely to formally suggest such a move any time soon. We would, however, expect each statement from here on in to get progressively more aggressive.

Outlook for Borrowers: Post November MPS

Jason Wong -
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- With expectations of unchanged monetary policy for at least another nine months, wholesale floating rates and short-dated wholesale fixed rates should remain flat through the rest of the year and into early next year. This suggests little need for businesses to rush in to protect against higher short term rates.

- We still think that the low in 5-10 year wholesale rates this year has probably passed. With the balance of risk skewed to the upside for long-dated rates, an active strategy of hedging dips in rates seems entirely appropriate.

Markets Too Focussed on Downside Risks

Stephen Toplis -
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- Slump in confidence does not portend slump in activity
- Though growth likely to undershoot RBNZ and Treasury assumptions
- Inflationary pressures are building
- Corporate profit margins under pressure
- Debt programme likely bigger than Government forecasts

We are very strongly of the view that the New Zealand economy will keep on keeping on post the change in government but we cannot stress enough that market participants must be more wary of the inflationary pressures that are developing than the negative confidence impact on activity.

Labour Market Tightens Further

Stephen Toplis -
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- Unemployment rate drops to nine year low
- It will fall further
- Markets respond to heightened inflationary risk
- Corporates face margin compression

The over-riding conclusion that can be reached from today’s data is that the labour market is tightening by the second and is putting upward pressure on wages. Moreover, the tightening is in excess of RBNZ expectations and set to tighten even further.

Businesses Suffer Election Compunction

Craig Ebert -
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- ANZ business survey softens noticeably
- Even before the change of government known
- But no sway on our views, especially re inflation
- Consents underscore building sector resurgence
- Lending more "support" to inflation outlook

It was no great surprise to see this afternoon’s ANZ business survey continue to soften, given the election backdrop. However, after accounting for seasonality, it was a bigger drop than we might have imagined. And this was before the new government was announced – meaning the first meaty judgement on this will come in November’s survey. For now, we’ll just take the wobble in confidence on board, while reassessing our macro-economic views in light of the new policies primarily.

Deficit Narrowing For Now

Doug Steel -
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September’s merchandise trade deficit of $1,143m was wider than market expectations of a $900m deficit although not quite as wide as the $1,360m deficit we anticipated. September’s trade results saw the annual merchandise trade deficit continue to shrink, to $2,908m in the year to September from $3,154m in the year to August. We expect the annual deficit to continue to narrow over coming months, before widening through 2018 as dairy prices lose steam.

NZD Plummets on Political Change

Stephen Toplis -
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- NZD falls on uncertainty
- Potentially putting upward pressure on future rates
- Fiscal policy to ease
- More debt to be issued
- Growth on a firm footing

Heightened uncertainty has seen the NZD tumble. Significant policy change is afoot. But above all, the NZ economy is well founded. We remain, guardedly, optimistic for the way ahead.

Inflation - A Core Problem

Stephen Toplis -
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- CPI says tighten sooner
- RBNZ’s core measure says quite the opposite
- But core outcomes validate past actions more than they dictate future policy
- Headline increase will pressure wages
- We still have a tightening bias

Recent consumer price inflation suggests that monetary conditions might need to firm faster than the RBNZ has assumed and, perhaps, even faster (or further, at least) than the market has priced.

Dairy Dip

Doug Steel -
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- Dairy prices ease at auction
- Skimmilk powder prices slump further
- As EU considers what to do with its stockpile
- We tab down our 2017/18 milk price forecast to $6.30


The GDT Price Index fell 1% at auction overnight, to be down 5.1% since a recent peak back in June. The ongoing drift lower in international prices as milk supply increases and as the EU considers how to unwind its massive stockpile of skimmilk powder sees us lower our forecast for Fonterra’s milk price to $6.30 for the 2017/18 season.

Rate Increase Closer

Stephen Toplis -
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- CPI inflation surprises
- Will put upward pressure on wages and expectations
- But no sign of a target breach in the foreseeable future
- And NZ institutional arrangements currently confused
- So policy uncertainty abounds

New Zealand consumer price inflation has soared well above RBNZ expectations. At 0.5% for the third quarter, 1.9% for the year, the rate of price increase was 0.3% above that projected at the time of the August Monetary Policy Statement. Some of this can be put down to factors that will be quickly played down such as stronger-than-expected petrol and food prices. But other aspects of the data, such as the above-forecast increase in non-tradables inflation (0.7% for the quarter, 2.6% for the year) should be greeted with greater consternation.

Wait and see

Doug Steel -
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PSI Solid

The Performance of Services Index (PSI) has remained stoutly expansive over recent months. Sure, it cooled marginally to 56.0 in September from 57.2 in August, but it remains well above its long term average of 54.4. In contrast to measures of business confidence that have noticeably dipped around the election, the PSI, as a survey of changes in actual activity, has held up well. The small monthly decline was well within usual variation. In combination with its strong manufacturing PMI cousin, which was released last week, it all suggests the economy maintained a decent amount of momentum in the third quarter.

Election Uncertainties

That is not to say that the election was not on the minds of many PSI respondents. Indeed, just like in the PMI, of the respondents citing the major factor on their business as being a negative one, about a quarter of these noted the election. This coincided with a dip in the proportion of positive comments in September to 56.6% from 66.9% in August. But encouragingly in being well above 50%, it shows positive comments still firmly outnumber negative ones. Also offering encouragement was the firm September PSI employment reading. At 54.1 it was up from 52.2 in August and smack on the 2017 year-to-date average, which is running stronger than last year’s average of 53.4. This bodes well for Q3 employment growth when the official figures are released next month.

Sales Expansion Slowing?

The PSI activity/sales indicator was one area that did show a material slowdown, although at 56.6 in September it hardly indicates slow growth. Still, it was down from 62.7 in August. This continues a volatile period for sales over the past six months, so we wouldn’t jump to conclusions on one month’s reading. But it is notable that it comes alongside the PSI for retail trade falling to an unadjusted 46.8, the lowest level for a September since 2011. Slower services sales indicators might just reflect election caution or perhaps the fact that school holidays didn’t start until October this year. But with much lower house sales and softer signals from the likes of electronic card transactions over recent months this bears watching. On the positive side, PSI new orders remain strong posting a, relatively rare, fifth consecutive reading above 60. New orders were also strong in last week’s PMI.

Service Sector GDP

Recent official figures revealed service sector GDP growth averaged an annual pace of 3.2% in the first half of 2017, above its 5-year average of 2.8%. Despite some ups and downs in the details, the ongoing strength in the overall PSI indicates that service sector GDP growth has maintained its strength into the second half of 2017.

Solid September

Craig Ebert -
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The PMI
September’s Performance of Manufacturing Index (PMI) proved to be about as strong as it was in August. Index wise, it was 57.5 versus 57.9, seasonally adjusted. Aside from remaining comfortably above its long-term average (of 53.4), this was a particularly encouraging result considering the proximity of the 23 September general election. Note: while respondents submitted their views in early October, it was in regards to how things were going through the course of September. Of the (minority) of respondents citing the major factor on their business as being a negative one, around a quarter of these referenced the election. So it wasn’t a non-issue, as such.

Activity/Sales
Even so, the manufacturing industry would seem to be forging ahead quite nicely. This was definitely the message in the PMI’s production index for September, with its seasonally adjusted result of 59.6. The tone from its new orders index remained relatively upbeat too, with 60.4. These elements corroborated areas of strength in the 3 October NZIER Quarterly Survey of Business Opinion (QSBO). In this, manufacturers indicated solid expansion in production and orders, especially when looking ahead. And with respect to output, expectations of domestic sales had overtaken those for exports. Note: QSBO responses occurred prior to September’s election.

Employment
Not every aspect of September’s PMI was expansive, however. In fact, its employment index fizzled out to 50.7, having been running nicely about the 56.0 mark in July and August. It’s tempting to see this as manufacturers pushing pause on their hiring, as they await news on the form of the next NZ government. However, we note that the PMI jobs index has been bouncing around viciously for the last 6 months or more, but with a reasonably positive average. And as a timely cross-check we note the QSBO view on manufacturing employment remained relatively upbeat. This was as true for reports on hiring for the last 3 months as it was regards the coming 3 months.

Capacity
The other reason we can imagine manufacturers are still out there hunting for staff is the fact that they are reporting increased difficulty in finding them. This is particularly the case for skilled staff (as it is for the economy at large). Yet in relation to physical capital, the latest QSBO suggested manufacturers were running less close to the wind. Its capacity utilisation measure, CUBO, for manufacturers eased to 90.1%, from 91.7% in Q2 and 92.9% in Q1. Rather than signifying any pull-back in demand this could well reflect the consequence of the decent pick-up we’ve witnessed in business investment in plant, machinery and equipment over recent quarters.

QSBO Demonstrates Political Correctness

Craig Ebert -
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- QSBO hardly rattled by the (prospective) election
- With steadfast commitment to employ and invest
- Fissures in building and services look transitory
- Inflation indicators firm but not lifting
- Responses to next government of most interest

The news in this morning’s NZIER Quarterly Survey of Business Opinion (QSBO) was that it held its shape rather well, when it might have gone a bit wobbly, if only because of its proximity to the general election. Sure, its net confidence subsided, but not all that much. More to the point, the QSBO’s indicators on activity, employment, investment, profitability, capacity constraint, and pricing/costs, remained firm.

Frank Spencer

Craig Ebert -
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- RBNZ OCR and language unchanged, as expected
- Albeit as Spencer softens dig at “high” NZD
- RBNZ view of falling inflation up for debate now
- Post-election bidding for even greater fiscal stimulus
- But how might the business sector be impacted?

Acting RBNZ Governor, Grant Spencer, was reasonably frank at his first OCR review this morning. Nothing material had changed since the August Monetary Policy Statement (MPS). And so it was best to carry on with much the same messages, along with an unchanged cash rate of 1.75%. This was widely anticipated, certainly by local commentators.

Outlook for Borrowers: Post September OCR Review

Jason Wong -
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- With expectations of unchanged monetary policy for an extended period, wholesale floating rates and short-dated wholesale fixed rates should remain flat through the rest of the year and into early next year. This suggests little need for businesses to rush in to protect against higher short term rates.
- Borrowers have had plenty of opportunity to hedge longer-term interest rate risk at attractive levels over the last month or so. Anyone who “missed the boat” should look to reset their expectations. We think the low in rates this year has now passed. With the balance of risk to the upside for rates through to the end of next year, we still consider a hedge on dips strategy entirely appropriate.

Is It Nothing But Election Nerves?

Craig Ebert -
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- Business survey finally showing election nerves?
- As its GDP growth signal slows to 3% from 4%
- Inflation pointers congealing near 2%
- August trade miss no big deal for us
- Q3 GDP and current account still looking up

It looks like someone finally told the ANZ business survey that a tight election was afoot. Its net confidence tanked to zero in September, from +18 in August. But while this is a big fall, bear in mind the level is still majorly suppressed by seasonality this time of year. When we correct for this we get a net confidence reading of +14, which, while lower than August’s +29, is higher than it was back in April +7. The long-term average is +11. So September’s result is no disaster, or even a stalling, more a bit of temperance from a seemingly bullet-proof attitude over prior months.

A Centrist GDP Outcome

Craig Ebert -
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- Q2 NZ GDP expands 0.8% (2.5% y/y)
- No real surprise (for RBNZ included)
- But nominal GDP growth "just" 5.4% y/y
- No great fodder for election debate
- As growth indicators remain robust in Q3
- But immigration falls again in August

There might yet be some important implications for New Zealand’s economic outlook from Saturday’s election. But with that race still looking very tight we cannot presume to amend our views on anything at this point. Today’s Q2 GDP report certainly can’t be considered fodder for one side of the election debate or the other, when it comes to arguing the underlying health of the economy.

NZ Less Vulnerable

Doug Steel -
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- Current account deficit smaller than expected
- Part of a trend reduction in external vulnerabilities
- Indicating NZD not overvalued
- We expect current account deficit to shrink further
- Nothing here to change our +0.8% view for tomorrow’s Q2 GDP.

New Zealand’s external accounts are looking more and more benign by the day. Sure, the annual current account balance remains in deficit, as it has since 1973, but at the equivalent of 2.8% of GDP in the year to June 2017 it is smaller than its historical average. This result was a smaller deficit than the market consensus of 3.1% of GDP and even a touch smaller than our 2.9% forecast (helped by some revisions).

Upwards and onwards

BNZ - BusinessNZ -
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New Zealand’s services sector experienced a lift in expansion during August,
according to the BNZ - BusinessNZ Performance of Services Index (PSI).

Producing the goods

BNZ - BusinessNZ -
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New Zealand’s manufacturing sector experienced increased expansion levels
during August, according to the BNZ - BusinessNZ Performance of Manufacturing
Index (PMI).

Good-Looking Goods Trade

Craig Ebert -
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- Q2 merchandise terms of trade lift 1.5% (10% y/y)
- Likely fattening nominal GDP growth to 8% y/y
- Export and import volumes strongly expansive
- Putting upside pressure on our +0.9% pick for Q2 GDP

Compared to a year ago New Zealand’s merchandise terms of trade have lifted 10%. This is fundamental to the 8% annual growth we expect for nominal expenditure GDP growth in Q2, compared to “just” 2.6% on real (production-based) GDP. Consideration of TOT-fuelled nominal GDP growth is also important for thinking, more generally, about (per capita) income, the ability to save (and strengthen balance sheets), equity valuations and tax revenue to boot.

Growth Stronger, Inflation Weaker

Stephen Toplis -
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- NZ activity indicators portend strong growth
- Pushing profits higher
- Encouraging employment and investment
- Chewing into capacity, but not creating inflation
- And aiding the NZD lower

We’ve said it time and time before, and we’re forced to say it yet again. We are in a rather unusual environment where growth continues to escalate, capacity is being fully utilised, businesses are investing and hiring, and yet inflation remains an abstract concept. This, again, was the message from today’s ANZ Survey of Business Opinion.

Financial Markets Wrap

Domestic politics weigh on NZD

Jason Wong -
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- NZD down 4½% on TWI basis on political change and uncertainty
- NZ rates lower post-election; NZ equities higher
- USD and US rates higher

NZD up on most crosses in September

Jason Wong -
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- After a poor August, NZD gained against most major currencies
- GBP outperforms as BoE signals imminent rate hike
- Global rates higher as confidence in Fed tightening increases

BNZ Financial Markets Wrap

Jason Wong -
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- NZD significantly lower, near 5% on many crosses
- Unwinding strength over recent months
- Speculators wrong-footed

Interest Rate Strategy

Interest Rate Strategy: Short rates hit record low

Jason Wong -
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- Short term interest rates have hit a record low. The 90-day bank bill rate traded at 1.905% and some government rates like T-bills and RB bills have recently been bid below the cash rate of 1.75%. Domestic liquidity is gushing, as banks are well ahead of funding targets and credit growth is softer.

- As these conditions continue, the 2-year swap rate has a good chance of reaching a fresh low for the year, down towards 2.10%. The top of the range into year-end and early next year is probably more like 2.25% now, with global forces being the most likely source of any upside pressure.

- The proposed new policy framework stemming from revisions to the RBNZ Act has had no bearing on our monetary policy outlook. Some traders and market commentators see the changes from a dovish perspective, but we do not agree with that assessment.

Markets Outlook

Rewriting Economic History

Craig Ebert -
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- Q3 retail sales likely to sport a hangover
- PSI (55.6) like PMI (57.2) robust to political flux
- Oct FPI leaves our Q4 CPI pick at 0.6% (2.1% y/y)
- Friday's migration figures to confirm further fall?
- We view Oct exports/imports bigger than market
- Annual accounts set to revise up GDP

So what about September quarter retail trade? The market’s median expectation is for a 0.1% increase in volume. We expect a real drop of 1.0%. With this there is scope to think spending by NZ consumers has been severely rattled, perhaps with reference to the election and such things as weak turnover in the housing market. But we would sniff at any weakness in Q3 retail volumes as largely a hangover, from turnover in Q2 over-egged by major sports events that New Zealand hosted.

Nominally Important

Craig Ebert -
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- Q3 GDP growth might struggle for 0.7%
- But CPI still set to exceed RBNZ expectations
- So can HYEFU sustain its nominal GDP forecasts?
- Q3 PPIs to slow on terms of trade peak
- Concrete and REINZ data of RBNZ interest
- Will politics spook Friday's Oct. PMI?

Last week’s RBNZ Monetary Policy Statement (MPS) has given us a well-defined reference point, but also a lot to chew on. Even with the Bank’s firmer outlook on CPI inflation we still believe there is potential for upside surprise on this, for instance. For today, however, we want to tease out a couple of points – in accordance with the bits of NZ data due this week – that relate to September quarter GDP and the housing market, including construction.

Time for Normalisation?

Stephen Toplis -
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- Time to drop policy neutrality
- Inflationary pressures are rising
- NZD weakness key
- Potential PTA and RBNZ Act changes no cause for inaction
- But general level of policy uncertainty a credible excuse

It is our strong view that the RBNZ needs to adopt a formal tightening bias when it releases its November Monetary Policy Statement this Thursday. It should probably back this up by moving its first published tightening forward from December 2019 to earlier in the year. But while we would strongly recommend this course of action we would not be especially critical of the Bank if it, instead, hid behind the wall of confusion that currently surrounds it for a while longer.

Change Brings Costs and Opportunities

Craig Ebert -
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- December's EFU crunch time for policy costing
- November MPS will surely forecast higher inflation
- Should the RB Act embed financial stability as well?
- Q3 pay-equity deal to start LCI on inflationary course
- Current NZ data hard to read around the election

We are certainly eager to see the full costing of the new coalition government’s policies. Of course, the Labour party was up front about its policy platform meaning for $7b more net core Crown debt by 2020/21 (and more than $11b more by 2021/22), compared to the pre-election EFU. It will be interesting to see if the new government can hold close to that. But, as people are asking, we suggest there is upside, possibly quite a bit. This suggests potential for the bond programme to be revised that much higher as a consequence.

Similar Growth, More Inflation?

Craig Ebert -
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- Awaiting the full policies of the new government
- Net growth impacts moot but reinforcing for inflation
- Suggesting RBNZ can’t/won’t be more relaxed
- Immigration already abating
- Merchandise trade the main NZ data this week

Now that we know the shape of the next NZ government we await the full policy prescriptions that stem from it. From “the partials” we’ve seen and heard to date, the net implications for GDP growth are open for debate (including around the details of what will effectively replace the 1 April “tax cuts” that are to be cancelled). But the indicated new policies do look likely to reinforce the upside we expect around inflation.

The Arbitrariness of Self-Imposed Targets

Craig Ebert -
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- 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

Stephen Toplis -
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- 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

Stephen Toplis -
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- 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

Stephen Toplis -
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- 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

Craig Ebert -
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- 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

Craig Ebert -
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- 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

Craig Ebert -
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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

BNZ Research -
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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.

Markets Today

BNZ Markets Today

Jason Wong -
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The USD has sustained the fall seen post the FOMC minutes yesterday. Overnight moves have been small, with US markets closed for the Thanksgiving holiday.

BNZ Markets Today

Jason Wong -
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In light trading ahead of the US Thanksgiving holiday, the USD has struggled and is the biggest loser. US equities are flat around record highs while UST yields are down slightly.

BNZ Markets Today

Doug Steel -
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Yesterday’s risk on tone extended overnight, as equities push onwards and upwards and the VIX fear index fell to a risk-loving level sub-10. The S&P500 poked just above
2,600 at one point for the first time and currently sits up around 0.7% on the day. European equities were up too, with the Euro Stoxx 50 closing up 0.5%. The DAX
outperformed rising 0.8%, a sign markets are shrugging off the current German political impasse.

BNZ Markets Today

Jason Wong -
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Risk sentiment saw some improvement overnight with US equities showing modest gains and US yields a touch higher. The VIX fear index has pulled back under 11 for the first time in over a week. Currency movements have been generally subdued, with limited data on offer.

BNZ Markets Today

Jason Wong -
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The NZD underperformed on Friday, alongside other commodity currencies. Global rates and US equities showed modest falls amidst a slight risk-off tone.

BNZ Markets Today

Jason Wong -
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Bear market risk averted. After five consecutive daily falls in the MSCI World Index, the obituaries were starting to be written for the bull market in equities. They can be safely tucked away for another day as there’s been a broadly based rebound, across Europe (+0.8%), Japan (+1.5%) and the US (+0.8% so far). Keep buying the dips seems to be the underlying message from investors.

BNZ Markets Today

Jason Wong -
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A risk-off tone remains evident which sees lower equity markets and bond rates but the NZD has remained steady overnight, after a round-trip in the USD.

BNZ Markets Today

Doug Steel -
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Equity markets are generally lower, led by energy stocks as oil prices fell. US yields are flat to lower, while the EUR is higher.

BNZ Markets Today

Jason Wong -
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There was more action in the bond market than currency markets on Friday, with US 10-year rates back retesting the 2.40% mark.

BNZ Markets Today

Jason Wong -
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Risk appetite is lower as US tax bill negotiations continue and it’s not looking great. That’s had more impact on US equites than the modest changes seen in currency markets. The USD is slightly weaker while UST yields are slightly lower.

BNZ Markets Today

Jason Wong -
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A dearth of top-tier economic data and Trump acting statesman-like in his trip across Asia are making for a very dull week in markets. Currencies remain tightly rangebound, equity markets are flat and global rates have barely budged.

BNZ Markets Today

Jason Wong -
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Amidst a lack of news flow or top tier data and light trading conditions, the USD is showing broadly based gains, while commodity currencies have underperformed. US equities are down slightly off record highs, while US 10-year rates have traded in a 3bps range.

BNZ Markets Today

Jason Wong -
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The new week has begun with a surge in oil prices, modest currency movements and a further nudge down in global rates.

BNZ Markets Today

Jason Wong -
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A fairly dull end to the week for markets, with muted reaction to the US employment report, and the NZD mixed on the crosses.

BNZ Markets Today

Jason Wong -
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GBP was slammed after the BoE’s “dovish hike” and the markets sees the US tax bill as a bit underwhelming, keeping the USD in check and helping nudge UST yield slower.

BNZ Markets Today

Jason Wong -
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The NZD has been the star performer, rising across the board after strong employment data and sustaining that increase. Overnight trading was quiet ahead of the FOMC’s announcement this morning, which ended up the non-event it was widely expected to be.

BNZ Markets Today

Jason Wong -
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There has been a plethora of economic data released over the past 24 hours, only some of it market-moving. Commodity currencies have underperformed while global rates have barely moved.

BNZ Markets Today

Jason Wong -
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It has been a fairly quiet start to the week ahead of a busy
economic calendar. The USD and rates are down slightly
as talk of watered down tax reform emerges.

BNZ Markets Today

Jason Wong -
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Commodity currencies outperformed on Friday, with the
NZD leading the charge, while global rates fell.

BNZ Markets Today

Jason Wong -
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The USD is stronger across the board on increased confidence that a tax reform package can be delivered while the EUR fell after the ECB’s “taper” announcement. UST yields remain steady against lower European rates.

BNZ Markets Today

Jason Wong -
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There’s been plenty of information flow and some decent price action across asset markets in the past 24 hours. At last, back to the good old days. For a change, the NZD has been out of the spotlight, seeing it more mixed on the crosses, against a backdrop of weaker global equity markets and higher global rates.

BNZ Markets Today

Jason Wong -
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The NZD has underperformed again as the policy vacuum continues, while overnight we’ve seen US equities power on higher and US 10-year rates breach the critical 2.40% mark.

BNZ Markets Today

Jason Today -
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The week has begun on a quiet note. The NZD is showing signs of forming a base after its initial swoon following the formation of a new government. Coming back from a long weekend, locals will note that the NZD is little changed on a TWI basis since leaving the office on Friday. It is slightly weaker against the USD and GBP and slightly higher against the other key developed currencies.

BNZ Markets Today

Jason Wong -
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The NZD is down significantly after NZ First opted to support a Labour-led government, while the rates market reaction has been muted. A slight risk-off tone has enveloped markets overnight, with global equity markets showing a rare fall, a higher VIX and UST yields nudging lower.

BNZ Markets Today

Jason Wong -
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Another day, another push higher in global equity markets to fresh highs, with strong US earnings supporting the move. The NZD is on the soft side as we await the formation of a new government, while JPY is softer as global bond rates push higher.

BNZ Markets Today

Jason Wong -
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More of the same. Low volatility, small price changes and the US equity market cracking another milestone, this time 23,000 for the Dow Jones index. NZD is relatively flat against a backdrop of broad increased support for the USD.

BNZ Markets Today

Jason Wong -
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The NZD and AUD ended the week on a strong note, after US CPI inflation came in weaker than expected, which did no favours to the USD, while UST yields fell. Meanwhile US and global equities (MSCI index) reached an all-time high, while the WSJ noted how equities benchmarks in Germany, UK, Japan, Hong Kong, Taiwan and New Zealand all reached multiyear or record highs this week.

BNZ Markets Today

Doug Steel -
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GBP hogged the limelight overnight, with NZD and AUD also performing strongly. Equity markets are little changed. US bond yields have slipped lower, as have oil prices.

BNZ Markets Today

Jason Wong -
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A dearth of data or news has seen only small changes in financial asset prices. Ahead of the FOMC’s September meeting minutes this morning at 7am, currencies were largely tracking sideways in small ranges. The minutes didn’t surprise and market reaction was fairly muted.

BNZ Markets Today

Doug Steel -
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A lower US dollar featured in overnight markets, as US yields dipped. Oil prices rose, while equities were mixed.

BNZ Markets Today

Doug Steel -
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It was a very quiet session overnight, compounded by Columbus Day holiday in the US. European bond yields are a touch lower, while equity markets are generally little changed and currencies typically traded in tight ranges. The DXY US dollar index is marginally lower, down less than 0.2% on the day. USD/JPY is unchanged at 112.70.

BNZ Markets Today

Jason Wong -
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There was some messy trading action on Friday, but the net result was some fairly modest changes for currencies, bonds and equities. The NZD ended the week on a soft note, closing below 0.71.

BNZ Markets Today

Jason Wong -
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After a pause over the past couple of days, the USD recovery has reignited, amidst a backdrop of fresh highs in the S&P500 and UST yields ticking higher.

BNZ Markets Today

Jason Wong -
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It has been yet another day of modest financial price movements, as traders keep their powder dry ahead of Friday’s US employment report.

BNZ Markets Today

Jason Wong -
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In a day of where most market movements have been microscopic, the NZD has underperformed after a weaker than expected dairy auction.

BNZ Markets Today

Jason Wong -
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The new quarter has kicked off where the last one ended, with a stronger USD across the board, fresh highs in US equities, and the VIX index hovering around historical lows. UST yields have peeled off after earlier reaching a fresh 2½-month high.

BNZ Markets Today

Jason Wong -
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The September quarter ended on a fairly uneventful note. There was a lot of data to digest on Friday but the net result was only modest changes in currency markets. US Treasury yields ticked higher, the S&P500 made yet another record high, while the VIX index remained near its fearless level of 9.5.

BNZ Markets Today

Jason Wong -
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A key theme over recent weeks has been a recovery in the USD and higher US Treasury rates from their lows for the year, supported by more conviction in further Fed monetary policy tightening and an increased chance of Trump getting a tax reform programme into law. There has been a pause in that trend for no obvious reason overnight. Month-end and quarter-end flows might be affecting markets, with not a great deal of news for the markets to grab on to.

BNZ Markets Today

Jason Wong -
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With US tax reform and Fed hikes on the minds of investors, global rates are a lot higher and the USD is broadly higher, except against the NZD, which has recovered some its post-election sell-down.

BNZ Markets Today

Jason Wong -
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The USD is in the driving seat, making broadly based gains, while the NZD continues to underperform.
The USD is up on all the crosses bar the CAD, with a steady climb from last night without any notable key driving factors. It might reflect a number of factors, including more confidence that the USD is at a turning point after its steady decline for much of the year taking it well into “oversold” territory, increased confidence of tax reform and the EUR being out of favour after the surprising Germany Federal election results. Economic data haven’t been a factor, with a slight easing in US consumer confidence from recent highs and a cooling in new home sales, as the impact of the Hurricanes begins to impact the data.

BNZ Markets Today

Jason Wong -
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A risk-off tone has developed, with US-North Korea tensions escalating, which sees JPY head the leaderboard and UST yields lower. EUR and NZD are softer as the market digests the election results.

BNZ Markets Today

Jason Wong -
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With daylight savings, the FX market doesn’t open until 8am this morning. The NZD had a decent run after the local close on Friday, which should limit any positive reaction for the NZD to Saturday’s election.

BNZ Markets Today

Jason Wong -
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The market has settled down after the FOMC’s policy update yesterday. The AUD and NZD are weaker, while UST yields have traded in a tight range.

BNZ Markets Today

Jason Wong -
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The USD has strengthened and UST yields have risen after the Fed’s latest policy statement. Against that backdrop the NZD and AUD have performed much better than other majors.

BNZ Markets Today

Jason Wong -
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Markets have been uneventful overnight, with only second-tier data releases and traders sitting on their hands, waiting for the Fed’s latest policy Statement in just under 24 hours. The NZD and AUD have been well bid for no obvious reason, while UST yields have drifted up a touch.

BNZ Markets Today

Jason Wong -
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The USD and rates are higher as the market positions itself for the FOMC meeting later in the week. Trading conditions are fairly quiet and that may remain the case until Thursday morning’s important update from the Fed. The consensus expects the Fed to announce the beginning of “quantitative tightening” (QT), with its balance sheet expected to begin shrinking from next month, initially at a pace of $10bn, and the Fed to keep its options open for another possible rate hike in December.

BNZ Markets Today

Jason Wong -
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In currency markets on Friday, GBP remained in the spotlight making further strong gains, while the NZD also closed the week on a strong note. The S&P500 closed at a record high, breaching the 2,500 mark while the VIX index closed the week near a highly risk-loving level of 10. Global bond yields tracked higher.

BNZ Markets Today

Jason Wong -
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GBP has surged after a more hawkish than expected BoE announcement, while moves in the USD and rates have been contained despite a positive inflation report.

BNZ Markets Today

Jason Wong -
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The key theme overnight is the USD recovery continuing, helped by some momentum on tax reform while UST yields have nudged higher.

BNZ Markets Today

Jason Wong -
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Yesterday’s risk-on move has been extended, with the S&P500 up to another record high and higher global rates across the board. GBP is the best performer after stronger inflation data, while the NZD has been supported by a shock political poll.

BNZ Markets Today

Jason Wong -
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Risk sentiment has bounced higher, leading to a shift out of safe-havens, while the USD has shown signs of recovery. US and European equity markets are up around 1%, the former flirting with another record high, the VIX has fallen to a 10-handle, gold prices are down over 1%, JPY and CHF have slumped more than 1% and global bond yields are higher across the board, a classic risk-on move.

BNZ Markets Today

Jason Wong -
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During Friday’s session, the USD reached its lowest level since the beginning of 2015, while US 10-year rates fell almost to the 2% mark, before closing slightly higher.

BNZ Markets Today

Jason Wong -
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The USD remains under pressure for various reasons, while the EUR has performed well despite the ECB’s warnings. A lack of detail on ECB policy sees lower German yields, helping to drive down US Treasury rates to new lows.

BNZ Markets Today

Jason Wong -
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Risk sentiment has improved with US equities modestly higher, the VIX index down to 11.5, global rates up a bit and a softer Yen. The NZD is weaker for no apparent reason, after its top-performing move in the previous session, while the CAD has surged ahead after a surprise rate hike.

BNZ Markets Today

Jason Wong -
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For a change, the NZD is the top performer for the day, while the USD remains out of favour as US Treasury yields hit a fresh low for the year.

BNZ Markets Today

Jason Wong -
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With the US on holiday, trading activity has been quiet. With little economic data to trade on, the focus has been on North Korea’s provocations, which have seen a modest shift into safe-haven assets.

Markets Today

Jason Wong -
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After a quiet day during local hours, markets were choppy during the Friday night trading session. The net result was strength in the CAD and AUD, with the NZD underperforming its commodity peers. Risk appetite ended the week on a positive note, with equity markets modestly higher, the VIX back down to around 10 and global rates higher.

BNZ Markets Today

Jason Wong -
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There has been a truckload of data to digest and a number of news stories over the past 24 hours. The NZD has been a net loser, finding itself at the bottom of the leaderboard yet again, rounding off a poor month, and going against the grain of better risk sentiment and outperformance of the other commodity currencies.

BNZ Markets Today

Doug Steel -
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Positive economic news overnight saw equity markets rise, yields edge up and the USD dollar lurch higher. Making a change from recent sessions, economic news had some influence on markets overnight. ADP employment showed the US added 237k jobs in August, beating expectations of 185k. It offers encouragement for official payrolls data on Friday and is likely to keep the USD on the front foot for now. The positive vibe was enhanced shortly after when upward revisions to US Q2 GDP growth were bigger than anticipated. Growth was revised to an annualised pace of 3.0%, its fastest pace in two years.

Markets Today

Doug Steel -
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Shortly after we pushed the send button yesterday, news broke that North Korea had fired a missile toward Japan. Any prior thoughts of a quiet session disappeared as risk sentiment soured. This saw equities drop, safe havens like the JPY, CHF, and gold higher, while commodity currencies like the AUD and NZD were sold.

Markets Today

Doug Steel -
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The USD remains under downward pressure during still thin trading in the Northern Hemisphere summer. Gold prices lift, while oil slips. Equities and bond yields are marginally lower.

BNZ Markets Today

Jason Wong -
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The Jackson Hole speech duo of Yellen and Draghi drove a weaker USD, with EUR leading the charge, while the NZD was a bystander. US 10-year Treasury yields closed the week near its lows.

Rural Wrap

Rural Wrap - Slow Spring

Doug Steel -
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- Spring 2017 lamb number estimates reduced
- Expected milk production increase also tempered
- Recent wet weather unhelpful for many
- Export growth outlook lowered, shaving GDP forecast


Export volumes of meat and dairy products over the coming season will, as usual, be a function of farmers’ previous decisions based on such things as climatic conditions and farm economics as well as events through the season itself. That is, what is happening on farm gives a good steer to what lies in store for exports. Winter and early spring weather has been less than ideal, crimping the outlook for export volumes.

Strategist

BNZ Strategist

Craig Ebert -
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Economic Outlook
The evolution of housing and construction are not only important for the outlook for economic growth, but also the trajectory of inflation. Last week’s RBNZ Monetary Policy Statement highlighted a weaker (although not weak) outlook for housing and construction, amid GDP growth projections that otherwise strengthened. This seems as much a function of a softer starting point as a genuine toning down of future prospects. Indeed, the leading indicators on home-building activity have perked up again over recent months and today’s Q3 concrete production figures poked a touch higher, albeit with significant regional variation. Latest building consents and construction firms’ activity expectations in the coming fortnight’s data will be worth monitoring. Sure, existing house sales are weak, dented by increasingly aggressive LVR restrictions. But across a range of indicators the broader housing market still looks in good heart – probably too good for the RBNZ to start relaxing LVR restrictions just yet.

Interest Rate Outlook and Strategy
Short term interest rates have hit a record low. The 90-day bank bill rate traded at 1.91% and some government rates have recently been bid below the cash rate of 1.75%. Domestic liquidity is gushing, as banks are well ahead of funding targets and credit growth is softer. As these conditions continue, the 2-year swap rate has a good chance of reaching a fresh low for the year, down towards 2.10%. The top of the range into early next year is probably more like 2.25% now, with global forces being the most likely source of any upside pressure. Meanwhile, the proposed new policy framework stemming from revisions to the RBNZ Act has had no bearing on our monetary policy outlook, in contrast to some others’ views.

Currency Outlook
Over the past 12 months, the NZD has depreciated against most major currencies, including significant falls against EUR, GBP, and CAD. This has closed up some of the long-term currency misalignment as measured by our purchasing power parity estimates. On a TWI basis, the NZD is currently very close to our long-term PPP estimate, supporting RBNZ Acting Governor Spencer’s recent statement that the NZD was ‘closer to a sustainable level’. Our PPP estimates have no bearing on our 1 to 2 year ahead projections for the NZD. Corporates with a longer-term focus, say 3 to 5 years ahead, should budget for lower NZD/EUR, NZD/GBP, NZD/JPY, and NZD/CAD cross rates. Over the longer-term horizon, NZD/USD is more likely to be higher than lower, while we have no strong opinion, one way or the other, on NZD/AUD.

BNZ Strategist

Stephen Toplis -
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Economic Outlook

We have had a go at recasting our forecasts based on current information on likely government policies. This should be thought of as work in progress and will evolve as we get more detail. As they stand, our new forecasts will likely grate with those in the market forming a softer view on NZ (and the RBNZ). Big-picture, our GDP growth expectations are largely unchanged though different in composition; inflation more surely gets up around 2%; government debt threatens to track much higher than the Labour party has signalled and; corporate margins are crimped as input costs rise. For the record, the RBNZ’s August MPS published GDP growth track was 3.1% for the year ended March 2018; followed by 3.6% in 2019 and 2.9% in 2020. Our equivalents are 2.5%, 3.0% and 2.5%. Treasury’s Budget had 3.4%, 3.8% and 3.1% over the same period. If we are correct then there is clearly downside risk to government revenues which will be problematic for the government’s expenditure plans. There are no data of great significance over the coming fortnight.

Interest Rate Outlook and Strategy

The OIS market has pushed the timing of the first full 25bp rate hike to February 2019 from November 2018 and NZ 2 year swap has fallen 4bps to 2.16% largely on political headlines. We think that the NZ front end rally has been excessive. We suspect the politics-related receiving theme will run out of legs. We expect the RBNZ to hold the OCR at 1.75% next Thursday, but we believe the balance of recent economic developments will almost certainly see the Bank revise up its inflation forecasts. It is less certain what the bank will choose to do with its interest rate track. In any case, there seems very little chance that the RBNZ’s tone will be more dovish that it was in August and it may well be noticeably more hawkish. Our bias is for a constrained sell-off in the front end, seeing 2 year swap in a 2.10-2.30% range. 5s look too rich on swap curve against 2s and 10s.

Currency Outlook

Domestic political forces have seen the NZD underperform since the election, across a broad range of currencies. We see the NZD as oversold on this basis, given our view that the market need not fear a (small) change in government policy direction. Our short-term fair value model estimate has broadly tracked around USD0.72-0.73 since the election, supported by high risk appetite. This compares to current spot levels at sub USD0.70. A fading of the NZ political risk premium supports a closing of the valuation gap over the near-term and a broadly based recovery on most crosses. Next week’s RBNZ MPS should be NZD-supportive as the Bank lifts its inflation forecasts. We see no need to change our NZD projections, which have the currency anchored around USD0.69-0.70 through the next 12 months.

BNZ Strategist

Stephen Toplis -
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Economic Outlook

As we await the (full) details of the new government’s policies, we do wonder what their net effect will be on inflation, amongst other things. Annual CPI inflation has firmed already, of course. In Q3 it got to 1.9%, from 1.7%. Not only was this higher than the 1.6% expected by the RBNZ but the source of the surprise was, in part, due to a rise in non-tradables inflation – the bit that the Bank, in theory, has more control over. Standard measures of core inflation have also firmed up, to around 2.0% y/y. However, the sectoral factor model version that the RBNZ computes, and puts emphasis on, kept lagging at 1.4% y/y. While this is important to note, it’s also worth pointing out that this measure of core inflation has not, in the past, been the be all and end all of OCR ups and downs. Of the upcoming data, October’s ANZ business survey (31 October) will be tangled up in government formation hiatus. However, we expect the Q3 labour market reports (1 November) to be robust to the election process.

Interest Rate Outlook and Strategy

Volatility in NZ front end rates remains exceptionally low. NZ 2- year swap is at 2.21% and has traded in just a 5bp range all month. A small sell-off on a stronger than expected CPI print this week couldn’t be sustained after the RBNZ’s preferred annual core inflation estimate showed no change at 1.4%. We look to the early-November labour market data, including wage measures, as the next significant local data release. NZ long end yields are following global bond direction where our bias remains for higher yields. NZGB-ACGGB 10-year spread looks too tight relative to front end pricing. NZGB Apr-23s look rich on fly against Apr-20 and Apr-27.

Currency Outlook

In our view there is a big difference between saying an exchange rate is high or strong and saying that it is overvalued. At current levels there is no doubt, in a long-term historical context, New Zealand’s real exchange rate is high, but this can be easily explained by the nation’s strong terms of trade. Moreover, adjusting the IMF’s estimates for currency over/under valuation for recent NZ TWI movements suggests that the NZD real exchange rate is currently fairly priced on a medium to long-term basis. Our near-term assessment is unchanged from our re-estimated NZD/USD short-term model that suggests the NZD is currently a little oversold relative to fair value around 0.73. We also look at Singapore’s managed exchange rate process and see it as impractical for NZ to adopt.

BNZ Strategist

Doug Steel -
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Economic Outlook:
The election night outcome proved as inconclusive as the final handful of polls. With ‘special votes’ to be counted, we then await the result of negotiations to form the next government. From that we will still need to determine the paths of key policy, and make any adjustments to our macro-economic view as necessary. But there is more to note than government formation. One is the recent run of poor weather (too much rain) that has seen us nudge down our meat and dairy production and export volume outlooks for the current season; shaving our 2018 GDP growth forecasts to 2.9% from 3.1% in the process. For the coming fortnight, latest reads on consumer confidence and the PMI and PSI indicators will be difficult to judge given their proximity to the election. More interest will likely be in the Q3 CPI (due 17 October) whose annual inflation we think will stay at 1.7% y/y – inkling that inflation will not sag nearly as much as the RBNZ projects by early 2018, if at all.

Interest Rate Outlook and Strategy:
Last week’s RBNZ OCR Review did nothing to alter market pricing as the cash rate was held at 1.75% and guidance unchanged. It is likely to take more than one quarter’s slightly higher-than-anticipated headline inflation print to see the Bank budge. This is expected to keep short-end NZ rates range-bound. Near term, our bias for global yields is higher and that should flow through to the NZ front end, but RBNZ guidance is expected to cap 2y swap around 2.25% to 2.30%. The bottom of the range is seen around 2.10%. Multiple factors have seen US 10-year yields lift more than 30bps from their September low. We expect further gains, with a target of 2.60% by year end. This view translates into an NZGB 10y yield reaching 3.20% at that point. The influence on higher offshore long rates is expected to see the NZ 2s10s swap curve re-test at 120bps.

Currency Outlook:
The key USD indices are showing emerging signs of a broadly based recovery. In the context of a steady fall in the USD through much of this year, down over 10% at one stage, the approximate 2½% recovery has been fairly modest so far. We expect the recovery to progress further. Against this backdrop, the NZD is holding up well after some damage inflicted during August. We see fundamental support for the NZD at present via very high levels of risk appetite and NZ commodity prices performing well. If not for prospects of the USD reviving, we’d be thinking that the NZD ought to be heading a lot higher, rather than slip towards our year-end target of USD0.70.

BNZ Strategist

Craig Ebert -
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Economic Outlook

There might yet be some important implications for New Zealand’s economic outlook from Saturday’s election. But with that race still looking so tight, and coalition permutations reasonably many, it seems pointless to conjecture about how our economic views might need to change. With today’s Q2 GDP report coming in as expected (0.8% for the quarter and 2.5% y/y) attention turns to “what next?” Recent economic surveys still signal a solid growth path underfoot, in spite of the election coming into sharp focus. Consumer sentiment is robust. And we will get further insight into the minds of business with the 26 September ANZ survey. Then there’s the 3 October NZIER Quarterly Survey of Business Opinion to check out – which respondents will have also have filled out pre-election. The more interesting surveys will be those reflecting post-election sentiment and activity, including for the housing market.

Interest Rate Outlook and Strategy

We still see NZ short end yields range bound, anchored by an on hold RBNZ. Economic developments have not been sufficiently different to August MPS projections to warrant any change of cash rate (1.75%), or rhetoric, from the Bank at its meeting next week, especially amid likely post-election noise and it being the first OCR review from the Acting Governor, Grant Spencer. Meanwhile, we remain of the view that long end yields will track higher driven by expected increases offshore including in Australia and the US. The latter reflects our expectations for more Fed funds tightening than implied by current front end pricing and a higher term premium as the Fed balance sheet reduction proceeds and the ECB and other central banks slowly unwind accommodative policy.

Currency Outlook

Central bank statements and expectations can kick around currencies over the very short term but we think other drivers are more important over the medium term. Relationships between NZ-global rate spreads and the NZD have weakened over recent years. Risk appetite and commodity price trends are more important drivers of the NZD than interest rate differentials. Our monetary policy expectations don’t have a significant bearing on our outlook for the NZD over the next year or two. High risk appetite – its highest level this year – supports the current level of the NZD. Our (unchanged) projections for a weaker NZD into year end and early next year assumes that risk appetite peels back from its current giddy heights. A weaker commodity price dynamic is expected to give further weight to that view.

Thoughts on Q2 GDP

Craig Ebert -
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Dependent only on tomorrow’s manufacturing figures, our growth estimate for June quarter GDP remains at 0.9% (2.6% y/y). That is, based on the production-based measure. In terms of expenditure GDP we figure on a quarterly gain of 1.2% (2.4% y/y).