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

Peeling Back the Drivers

Jason Wong -
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- Traditional key drivers like risk appetite and terms of trade have not had their usual influence on the NZD so far this year. The lack of NZD carry seems to have had more influence and the market is, for now, giving due consideration to the RBNZ’s extended low rate guidance.
- US CPI and Trump’s questionable actions have recently clouded the outlook for Fed policy and the USD. The USD looks a little oversold at this juncture if one believes that ultimately political risks will fade and inflation will recover.
- Overall, while some fresh news has injected more uncertainty about the outlook, we remain comfortable with our year-end target of USD 0.67.

Currency markets are typically buffeted by a range of factors and half the battle is working out what the key driving forces are. Those forces tend to vary over time, come and go in terms of their importance, and new factors to consider pop up from time to time.

NZD Corporate FX Update

Jason Wong -
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- Commodity currencies have been out of favour over recent months and the NZD has been swept down, despite NZ’s softer commodity basket outperforming. Additionally, the RBNZ remains relaxed about the inflation outlook and the Bank is unlikely to rush into firmer policy guidance.
- short-term forecasts and leave our year-end target at USD 0.67 but flag downside risk to that as well.

NZD Looking Short-term Oversold

Jason Wong -
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- Over the year to date the NZD has underperformed, against economic fundamentals which have remained supportive. These include high risk appetite and strong NZ terms of trade. Net speculative short positioning is the greatest in nearly two years.

- Thus, there is a low hurdle rate for the NZD to recover over coming weeks and months. That said, ultimately see NZD/USD and NZD/EUR ending the year at 0.67 and 0.59 respectively. Economic relativities are expected to encourage NZD/AUD to gravitate to the mid 0.90s.

NZD/EUR: A Couple of Big Unknowns

Jason Wong -
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- NZD/EUR strength relative to our long-run fair value estimate of EUR 0.55 reflects NZ’s relatively strong terms of trade and the ECB’s highly accommodative monetary policy stance. Using a simple short-term model we can explain the current spot rate around EUR 0.66.

- Our projections show the cross holding up at, or above, current spot over the next six months, before facing headwinds and ending the year closer to EUR 0.64. However, our forecasts for EUR (and GBP) are under review pending the outcome of the French Presidential election and the surprise UK snap election announcement.

- The balance of risk is skewed to the downside over the medium-term, reflecting the likely strength of EUR once the ECB normalises monetary policy. The timing of ECB rate hikes is important, but uncertain. An offsetting factor is on going euro-area political risk, with the focus likely to turn to Italy late this year or early next year after the French Presidential elections are out of the way.

NZD Corporate FX Update

Jason Wong -
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- The NZD continues to consolidate after a significant fall in early March. While rising geopolitical risk is undoubtedly NZD-negative, a soft patch in US economic data sees the market trimming back Fed hike expectations. These two offsetting forces could see a relatively steady NZD over coming months.

- Our (unchanged) forecasts see the NZD hover around the USD 0.70 mark over the next 3-6 months, before headwinds re-emerge, resulting in a year-end target of USD 0.67.

Low Volatility Indicators Belie Global Uncertainty

Jason Wong -
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- Low volatility is prevalent across equities, bond and currency markets. This theme belies the widely followed “global policy uncertainty” indices that suggest heightened uncertainty. There are a number of identifiable risks to the outlook but we’d argue that the outlook is no more uncertain than usual. We think that clear central bank guidance is one factor behind the low vol environment. This removes a large source of uncertainty about the outlook for interest rates.
- Low vol implies high risk appetite. We think that risk appetite is likely to be weaker later in the year and this will be one factor acting as a headwind for the NZD.
- Times of low volatility can provide opportunities for investors to consider buying some cheap(er) protection via options. Hedging structures via options have become more attractive and should be on the radar for exporters and importers.

NZD Corporate FX Update

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The NZD has come under significant pressure over the past month or so. While we can explain some of the move, our working assumption is that it is currently a little oversold. After the significant fall, we see a period of consolidation over coming months. We’d view topside resistance being just above USD 0.72. Another bout of NZD weakness is expected, but more likely later in the year, and we stick with our year-end target of USD 0.67 for now.

Economy Watch

Government Has A Lot to Do With Pressure

Craig Ebert -
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Today’s Budget had a lot to do with pressure. Pressure to funnel some of surpluses back into the economy (in an election year); the pressure this will put on the economy’s resources, especially construction; all amid the ongoing pressure from a strongly growing population.

Commodity Winds are Now Tail Ones to Trade

Craig Ebert and Doug Steel -
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After a rough December quarter, New Zealand’s merchandise exports look to be rebounding quite well this year, while imports are largely maintaining their good momentum. So were the messages of this morning’s April trade account. And today’s milk price announcements by Fonterra were a further reminder that the commodity sector is now providing tailwinds to the economy, after cross-winds last year.

A Perfect Storm?

Doug Steel -
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New Zealand’s services sector experienced a sudden drop in expansion levels during April, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

In Gear

Craig Ebert -
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While New Zealand’s manufacturing sector saw expansion in activity soften slightly in April, the sector remains in healthy territory, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

RBNZ Dismisses Inflationary Developments

Stephen Toplis -
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We have witnessed rising inflation, rising inflation expectations, falling unemployment, a weakening currency and a strengthening global economy. We had thought this would rattle the Reserve Bank. As it turns out, it all seemed to have counted for little as the Bank left its stance unchanged from both its February and March missives.

New Zealand At A Glance

Craig Ebert -
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The New Zealand economy continues to perform well and we anticipate reasonable growth ahead. High immigration is playing a role but momentum is broad-based. Still, we believe the growth phase is broadly maturing/peaking.

Labour Market Still Booming in Everything But Wages

Craig Ebert -
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- Q1 labour market data generally strong
- But wage inflation still lagging, for now
- Nothing out of line with Feb MPS forecasts
- But next week's MPS all about the CPI track
- Hours affirm our caution around Q1 GDP

Will nominal wage inflation remain moderate, or is it bound to pick up? This is a key question for monetary policy, as we look to next week’s Monetary Policy Statement. In terms of activity there is no question that New Zealand’s labour market retains strong momentum, and is, at the margin, still tightening the screws. Be that as it may, wage and salary measures have not responded in their usual manner, or at least not quite.

Core Inflation More Than Apples

Doug Steel -
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- Inflation highest since 2011
- Significantly higher than RBNZ forecasts
- Higher inflation doesn't look like an aberration to us
- Core measures push above 2%
- Questions how long OCR can stay at 1.75%

The key message from today’s consumer price inflation figures is that core inflation is rising and has poked above 2% on some measures. That is more important than the headline annual inflation rate jumping up to 2.2% in Q1, or the specifics around which prices rose this particular quarter. That said, higher headline inflation is relevant to the extent that it is likely to influence inflation expectations. Keep watch for indicators on the latter over coming months and quarters.

Stepping Up

Doug Steel -
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New Zealand’s services sector continued to show increased expansion during March, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

The PSI for March was 59.0. This was 0.3 points higher than February, and the second highest level of expansion over the last 18 months (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining).

Marching Orders

Craig Ebert -
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New Zealand’s manufacturing sector saw activity increase further in March, with new orders leading the way, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

Inflation Not All Meat and Vege

Stephen Toplis -
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- QSBO intimates CPI inflation headed over 2.0%
- Labour market conditions tighten further
- Capacity utilisation hits record high
- Indicators suggest heightened investment activity
- Upward pressure grows on our GDP forecasts
Inflationary pressures continue to mount. That’s the main theme in today’s NZIER Quarterly Survey of Business Opinion (QSBO). Pricing intentions remain lofty, labour shortages are becoming more severe and capacity utilisation has hit a record. Some commentators reckon rising CPI inflation is all about oil and fresh fruit and veges. The QSBO would tend to suggest that there’s a little more to it.

Why the Reservation?

Craig Ebert -
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- Business optimism keeps abating
- But real-economy expectations stay solid
- And inflation pointers robust-to-rising
- Consistent with our macro views
- But inconsistent with a lagging RBNZ

But the real story from today’s business survey, if you’ll pardon the pun, is about inflation. In particular, its inflation expectations variable continued to float back up, with 1.83%. This compares to 1.73% in February and 1.44% back in October. And this is before we get the Q1 CPI outcome, which we believe will show annual inflation already up to 2.1%, from 1.3%.

RBNZ Uncertainty Dominates Rate Stagnation

Stephen Toplis -
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- OCR unchanged at 1.75%
- RBNZ’s uncertainty shows no sign of diminution
- Bank back-handedly acknowledges likely Q1 CPI spike
- But sees it as an aberration
- Implied rate track sticks with end 2019/early 2020 tightening

We continue to believe the RBNZ is understating the extent and impact of likely inflation over the next few quarters and will, eventually, be bullied into raising interest rates earlier than projected in its February MPS. Equally, however, we remain of the view that the market is a tad premature in its pricing of the first rate hike.

BNZ Interest Rate Strategy: Outlook for Borrowers: Post March OCR Review

Jason Wong -
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- Wholesale floating rates should continue to have a slight upside bias reflecting ongoing upward pressure on bank funding costs while the OCR remains unchanged.
- While in a tight range at present, short-dated wholesale fixed rates face gradual upside pressure in the second half of the year as we move closer to a tightening cycle that is expected to begin in 1H18.
- There is no urgency for those looking to hedge mid-curve wholesale fixed rates, but we see upside pressure to rates later in the year, largely reflecting global forces.
- Dips in long-end wholesale fixed rates should be considered as hedging opportunities.

At the 23 March OCR Review, the RBNZ reiterated its view that “monetary policy will remain accommodative for a considerable period”. In an early-March speech, Governor Wheeler reiterated that the Bank’s neutral policy stance was truly neutral, meaning an equal chance of a rate hike as a rate cut. This messaging was essentially repeated.

Stable Services

Doug Steel -
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New Zealand’s services sector remains at a stable and solid level of expansion, according to the BNZ - BusinessNZ Performance of Services Index (PSI).

The PSI for February was 58.8. Although this was 0.7 points lower than January, it was still the second highest level of expansion since November 2015 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining).

Orderly Business

BNZ - Business NZ -
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New Zealand’s manufacturing sector saw activity increase in February after a dip in expansion during January, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI).

Q4 Slowdown Primarily Transitory

Craig Ebert -
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- Q4 GDP slows to 0.4% (2.7% y/y)
- Under market's 0.7% and RBNZ's 1.0%
- Mainly as primary production jags down
- No surprise to us: we stay on 0.7% for Q1 GDP
- As New Year growth indicators remain decent
- While Q1 CPI to surprise RBNZ firmly to upside
We are sure some folk will worry about the slowdown reported for December quarter GDP (especially those who adjust the results for strong population growth). It expanded “just” 0.4%, after a lift in Q3 that was revised down to 0.8%, from 1.1%. However, we aren’t so worried. It seems to us a quarterly number assailed by an exaggerated correction in primary production, as NZ GDP is prone to from time to time. The more recent growth indicators still appear decent enough. And in thinking about the RBNZ’s response there is rising CPI inflation to contemplate in any case.

The Real Reason for NZ's Lower External Deficit

Craig Ebert -
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The main reason New Zealand’s external deficit is so much lower than it was back in 2008 is a substantially lower deficit in international investment income. Basically, the (accrued) cross-border flows of profits and interest payments. This, for the year to December 2016, was 3.0% of GDP. Back in 2008 it was 7.4%. The change reflects a much-improved balance sheet with the rest of the world, as well as the virtual collapse in global interest rates.

RBNZ Sounding Out Of Sync With Rising Global Tide

Craig Ebert -
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- Wheeler still sounding dovish in speech
- On global worries grander than other central banks see
- As world GDP/CPI views firm up
- Market still sees almost 3 OCR hikes by end-2018

Today’s on-the-record speech by RBNZ Governor, Graeme Wheeler, essentially fleshed out the “uncertainty” themes of the 9 February Monetary Policy Statement. In this respect, there was not much new in it for the markets (which were largely unmoved by Wheelers’ speech, so still positively inclined on the OCR outlook). We acknowledge the uncertainty, of course. But we also assess the Bank is over-emphasising the downside risks at the expense of the upside risks. In doing so, the RBNZ appears to be getting out of sync with the rising economic, and central bank, tides as well.

Terms Of Trade Underscore Nominal (GDP) Tailwind

Craig Ebert -
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- Terms of trade re-nearing record highs
- Emboldening nominal GDP growth expectations
- But dairy prices/payout likely peaking
- And weak OTI exports imply caution on real Q4 GDP
- News of Wheeler speech leaves us wondering

The December quarter Overseas Trade Indexes affirmed a strong tailwind for GDP growth – at least in a nominal sense. They were less positive about real growth in Q4, but then less negative with respect to global inflation. So in many ways the OTI data gelled with our view that real GDP growth might struggle to push much higher from here, but CPI inflation will likely rise regardless. Roll on nominal GDP growth.

Financial Markets Wrap

Commodity Currencies Soft in April

Jason Wong -
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- The NZD continued its run of underperformance
- NZD TWI down 2% in April and 6% for the three months ending April
- Market-friendly French Presidential election outcome supports risk appetite and EUR

A Broad-Based NZD Sell-Off in March

Jason Wong -
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- In March, the NZD was down 2-4% on all the major crosses we monitor…
- …not entirely justified when we consider fundamental forces
- Little change in global interest rates

NZD Underperforms In February

Jason Wong -
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- Soft RBNZ Statement triggers a weaker NZD
- AUD higher on commodities and RBA’s Lowe’s comments
- Goldilocks view of global economy/inflation dynamic leads global equities higher and bond rates lower

Interest Rate Strategy

Outlook for Borrowers - Post May MPS

Jason Wong -
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- Wholesale floating rates should remain little changed alongside a flat OCR through 2017; upside risk prevails through 2018 as an expected tightening cycle gets underway.
- Short-dated wholesale fixed rates should range-trade over the next couple of months, before facing gradual upside pressure in the second half as we move closer to a tightening cycle that is expected to begin in 1H18.
- Borrowers should be looking for dips in 3-5 year wholesale fixed rates to hedge exposure; we see upside pressure to mid-curve rates later in the year, largely reflecting global forces.
- Dips in long-end wholesale fixed rates should be actively considered as hedging opportunities, with risks skewed toward higher rates.

In the 11 May Monetary Policy Statement (MPS), the RBNZ reiterated its view that “monetary policy will remain accommodative for a considerable period”. The Bank saw the recent increase in inflation as transitory and believes that an unchanged OCR of 1.75% through to late 2019 will be required to generate headline inflation of 2% over the medium term.

Markets Outlook

A Choice Looking Budget

Craig Ebert -
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It’s all looking choice for Thursday’s Budget. New Zealand’s fiscal trajectory is looking more and more positive. This is thanks to a long efficiency drive on the part of government spending, along with solid tax-flow from a robustly expanding economy. However, as this is an election year – and a tight looking one at that – there’s added pressure to funnel some of the surfeit back into the economy

Unpredictable

Craig Ebert -
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- McDermott speech to expand on RBNZ reserve?
- A neutral stance but with OCR well below neutral
- Retail trade keeps booming in Q1
- April's slow PSI intriguing; PMI still strong
- Q1 business prices to show broader inflation
- April's tourism numbers up about 25% y/y?

Who was it who said never make predictions, especially about the future? They obviously didn’t work in the markets, where some sort of view – whether implicit or explicit – is often essential in order to navigate the way ahead. And to compare and contrast with others’ views. But as a reminder that we never quite know even the undercurrents of the economy, as a starting basis, this morning’s retail trade figures blew everyone out of the water. Even accounting for population growth, they remained rapid.

Warning: Explicit Tightening Bias Ahead

Stephen Toplis -
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- Higher cash rate demanded
- As inflation and inflation expectations rise
- Labour market nears full employment and NZD weakens
- RBNZ to prevaricate with modest shift to tightening bias
- We move our hike call forward to February

There is no excuse for the cash rate to be just 1.75% in New Zealand. But odds are the Reserve Bank will find one when it delivers its May 11, Monetary Policy Statement. As we see it: inflation expectations are elevated and rising; growth is at or above trend; capacity constraints are intensifying; headline and core inflation are around the mid-point of the Reserve Bank’s target band; the currency is proving to be weaker than anticipated; and commodity prices are pushing New Zealand’s Terms of Trade to near record levels. All of this argues for the cash rate to be a lot closer to neutral than where it currently is.

Labour Market Powering Through the Crosswinds

Craig Ebert -
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- HLFS to continue its jagged improvement in Q1
- But needs cross-checking with QES and LCI reports
- RBNZ inflation expectations survey now due Friday
- Dairy price recovery levelling off?
- April's QVNZ housing report…another mixed one?

If we are not so sure about what figures the HLFS will throw up for the March quarter, we are confident about the broad trajectory of New Zealand’s labour market. Based on the staffing indicators we look at we get a clear sense of above-average momentum.

Let the (Fun and) Games Begin

Craig Ebert -
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- RBNZ should move to a clear tightening bias
- But it's likely to resist for as long as it can
- Masters games (then Lions tour) add to tourism
- Migration, trade and building consents due for March
- French politics goes to show NZ's relative centrism

The World Masters Games are well under way in New Zealand this week. We can also see some fun and games playing out between a Reserve Bank doing its best to maintain a 1.75% cash rate low, and a market seeing this as increasingly unjustified with inflation firming as much as it is. At the February Monetary Policy Statement (MPS) we struggled to find anyone who seriously thought there was a chance of further OCR easing (as the Bank then indicated). For the 11 May MPS the question will come on any gambit by the Bank to maintain its neutral stance.

CPI Inflation to Persist Around 2%

Craig Ebert -
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- Annual CPI inflation to hit 2.1% in Q1
- And will keep middling the 1-3% target band thereafter
- Pay-equity ruling to ripple into macro wage data
- Prices likely higher at dairy auction overnight
- Impacts of this wet autumn bear thinking about
- Can the PSI hold above the now-racy PMI (57.8)?

As we’ve done for awhile, we expect Q1 CPI inflation to be miles above what the RBNZ expected as per its February Monetary Policy Statement, namely 0.3% for the quarter and 1.5% for the year. To be fair, the Bank has since intimated that its expectation is now higher. But also that it doesn’t see annual CPI inflation holding up near 2% beyond the short term. In contrast, we believe it will stay up. The Quarterly Survey of Business Opinion pointed to this as well.

The More Things Change (for the RBNZ)

Craig Ebert -
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- More potential changes to/for the RBNZ
- But unlikely to alter monetary policy judgements
- March ECT to inform on Q1 retail volumes
- March PMI due Thursday
- We expect March Food Price Index fell 0.2%

There will be some potentially interesting changes at, and for, the Reserve Bank of New Zealand over the next twelve months or so. However, we don’t believe any of it will cause the Reserve Bank to act that much differently to what it would under the status quo. Or, at least, it shouldn’t. One thing that will not change, we believe, is the commitment to inflation targeting/control.

Monetary Policy Pressures to Evolve Further

Stephen Toplis -
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- QSBO to portend moderating growth
- But elevated inflationary pressure
- Opposition Finance spokesperson to muse on monetary policy future
- Change in RBNZ Governor will not mean change in RBNZ stance
- Commodity price inflation has peaked

Tuesday’s QSBO should reaffirm moderating growth accompanied by rising inflationary pressure (at least at the headline level). Meanwhile, the RBNZ will stick to its knitting even after the Governor departs. But keep an eye out for the opposition finance spokesperson’s monetary policy musings for potential shifts in direction if a close-run election was to deliver a change in government.

The Big Picture

Craig Ebert -
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- Friday’s business survey in focus
- As RBNZ sounds relaxed about inflation pick-up
- Regional GDP figures due Thursday
- Feb’s building consents to rise above Canterbury’s drag?
- Sector balance sheet data due Friday
The Reserve Bank now seems to accept the likelihood of annual CPI inflation printing around, even above, 2% in Q1 2017 (about two years earlier than previously forecast). However, the RBNZ also seems to be looking through this sudden return to the middle of the 1.0 to 3.0% band as reflecting temporary impacts – namely food and fuel. The Bank would seem to be unconvinced annual CPI inflation will stay around 2% for any length of time, even with the lower than expected currency.

Inflation “Gradually” Returns to Target?

Stephen Toplis -
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- RBNZ’s OCR stance unmoved
- But hard to deny inflation’s prospective jump
- TWI, food and fuel to blame
- Consumer and business confidence robust
- Net migration peaking

The RBNZ should be moving to an explicit tightening bias. But it’s got plenty of excuses not to so it probably won’t.

RBNZ Conundrum Intensifies

Stephen Toplis -
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- Q4 GDP likely to print soft
- We forecast just 0.4% (RBNZ at 1.0%)
- But food prices push inflation ever higher
- March CPI 0.9%q, 2.1%y/y? (RBNZ 0.3% and 1.5%)
- External accounts remain well-behaved

We’ve got a sneaking feeling that the RBNZ may have a marketing headache ahead of it. If we are right with our near term projections then GDP growth will come out around half of what the RBNZ expects while CPI inflation will be more than double.

Reduced Fat

Craig Ebert -
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- Building Work a plus for Q4 GDP
- But January's building consents cement a falling trend
- Will Q4 wholesale and manufacturing also disappoint?
- We trim our 2016/17 milk price forecast 30c to $6.10
- Ahead of likely price fall at this week's GDT auction
- Soon-moving Fed a sign of rising global tide

There are indications of less fat in the New Zealand economy. Not only do we expect Q4 GDP to slow from its late-2016 pace but we’ve just revised down our milk price forecast for 2016/17, while this morning’s building consents for January failed miserably to bounce. Even so, there still seems enough to sustain decent growth in 2017 and upside pressure to inflation – especially with the global tide now pointing this way as well.

Markets Today

BNZ Markets Today

Jason Wong -
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It was a quiet end to the week ahead of the long US weekend, with US equities flat, UST yields little changed and a flat USD. Economic data released had no impact on the market. They showed a modest upward revision to US Q1 GDP to a still-underwhelming annual rate of 1.2% and soft core durable goods orders.

BNZ Markets Today

Jason Wong -

It was a quiet end to the week ahead of the long US weekend, with US equities flat, UST yields little changed and a flat USD. Economic data released had no impact on the market. They showed a modest upward revision to US Q1 GDP to a still-underwhelming annual rate of 1.2% and soft core durable goods orders.

BNZ Markets Today

Jason Wong -
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US equities are probing fresh highs, led by the consumer discretionary sector on positive retail reports, and the VIX index is probing sub-10 levels. However, the risk-on environment hasn’t supported the NZD as it weakens a little alongside other commodity currencies on much weaker oil prices. UST yields have traded in a tight range.

BNZ Markets Today

Doug Steel -
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Central bank comments generated the most action overnight. But generally subdued trading conditions prevailed through most of the night with limited movement across many markets ahead of this morning’s Fed minutes.

BNZ Markets Today

Doug Steel -
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Markets moves were generally within tight ranges overnight, with a modestly pro-risk undercurrent. US equities are currently up smalls (+0.2%), following mostly positive closes across Europe. US bond yields have pushed a bit higher while oil prices nudge upwards. The USD is firmer.

BNZ Markets Today

Jason Wong -
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The NZD tops the leaderboard, on a day with little economic data or fresh insights. US equities continue to recover from their hit mid last week, supported by defence stocks, as President Trump signed an arms deal with Saudi Arabia worth more than $100b. The S&P500 index is up 0.5%, while the VIX index continues to fall from last week’s spike and is now down to around 11.

BNZ Markets Today

Jason Wong -
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It was a fairly uneventful trading session on Friday, with little data to speak of. Trump remained in the headlines, with fresh news about his conversations with Russian officials and investigators identifying a current White House Official as a “person of interest” in their probe of Russian influence on the election. After the close, former FBI Director Comey agreed to testify before a Senate Committee.

BNZ Markets Today

Jason Wong -
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Markets are in a calmer mood following the big risk-off move the previous day. After the chunky 1.8% drop in the S&P500 yesterday, it is up 0.8% for the day, while the VIX index has fallen from around 15.5 to 14.5. The USD has recovered as well. Much of the positive movement has been attributed to a Zero-Hedge report which highlighted an earlier testimony by former FBI director Comey, where he said that “he had not been pressured to close an investigation for political purposes”. This might get President Trump off the hook.

BNZ Markets Today

Jason Wong -
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With no top tier data to focus on this week, it was inevitable that Trump would regain the spotlight. And so it is, with the “dodgy” revelations of Trump allegedly asking FBI Director Comey to drop a probe of his former national security advisor – an impeachable offence according to some. This follows the recent firing of Comey and reports of Trump passing on secret intelligence to Russia. All this adds further distraction to Trump’s pro-growth policy agenda, which has yet to, and may never, get off the ground.

BNZ Markets Today

Doug Steel -
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Equity markets are little changed, while oil prices are marginally lower following yesterday’s jump higher. US long bond yields are down a couple of points. More movement was seen in foreign exchange markets.

BNZ Markets Today

Doug Steel -
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Oil prices jumped higher mid-afternoon yesterday after energy ministers of Saudi Arabia and Russia said they favoured extending oil production cuts by nine months to the end of Q1 2018. Major oil-producers are scheduled to meet later this month. After starting the week around US$50.80, Brent crude oil prices immediately leapt higher then extended gains overnight to above $US52.50 before settling back under $52 currently; up 1.9% on the day.

BNZ Markets Today

Jason Wong -
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Amidst a number of economic releases on Friday, only softer US inflation and retail sales data managed to move the market, resulting in a weaker USD and lower UST yields.

BNZ Markets Today

Jason Wong -
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US equities are down slightly with no fresh news to push them beyond their recent record level, while the VIX index has nudged up further to around 10.5. Global bond yields have shown only small changes, while in the currency market the NZD and GBP are weaker after central bank policy statements.

BNZ Markets Today

Jason Wong -
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Commodity currencies take out the top four places in the daily leaderboard following a strong bounce in oil prices. Other currencies show little change and bond and equity markets are quiet.

BNZ Markets Today

Jason Wong -
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The USD and UST yields continue to head north as the market becomes more convinced of Fed hikes ahead. There have been no top tier data releases in the US this week, but Fed speakers have been in force and the general message continues to be one of little change to the economic outlook, despite the soft Q1 GDP data. The Fed’s George saw risks from delaying gradual rate hikes. Both George and Rosengren favoured beginning the process of balance sheet normalisation this year.

BNZ Markets Today

Jason Wong -
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The week has begun with slightly improved risk sentiment, which sees the VIX index below 10, global equity markets reaching fresh highs and higher global bond yields

BNZ Markets Today

Jason Wong -
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Early reports this morning suggest that Macron has decisively beaten Le Pen by about 65-35% in the second round of the French Presidential election, as expected. This sets the scene for positive risk sentiment as the new week begins.

BNZ Markets Today

Jason Wong -
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This week’s theme has been weakness in commodity prices, driving down the commodity currencies, and that has continued overnight. Global commodity indices like the Bloomberg index and CRB index have made fresh lows for the year. A range of metal prices has been slammed, iron ore prices are limit down, and oil prices are down around 5%. WTI crude is flirting with USD 45, back to the level prevailing before OPEC’s supply agreement was initiated at the end of November.

BNZ Markets Today

Jason Wong -
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Trading activity was light ahead of the FOMC announcement this morning. Economic data had little impact on the market. The US ISM non-manufacturing composite was better than the market expected, but the USD had already main some modest gains ahead of that release and there was no further push higher. Euro area GDP growth of 0.5% q/q in Q1 was in line, confirming the robust growth picture in the region.

BNZ Markets Today

Jason Wong -
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Market movements have been modest ahead of tomorrow morning’s FOMC statement. Currency movements against the USD are all within +/- 0.4% for the day, while the NZD has outperformed modestly.

BNZ Markets Today

Jason Wong -
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With much of Europe and Asia on holiday, trading conditions have been light. US equities are up slightly, the VIX has fallen to near-historical lows and the NZD and AUD head the leaderboard.

BNZ Markets Today

Jason Wong -
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A plethora of data was released on Friday, but there was little sustained market reaction to any of it. Currencies, equities and bond yields all showed little movement for the day. Markets have become immune to President Trump’s jingoistic outbursts, seeing them as a negotiating tool than given any serious credence. On Friday, Trump commented that the US could have a “major, major conflict with North Korea” if diplomacy didn’t work, but the market didn’t take much notice. Early Saturday, reports came through of another failed test missile launch by North Korea.

BNZ Markets Today

Jason Wong -
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There has been a mountain of policy announcements and data to wade through over the past 24 hours but the net result has been modest currency movements, and small changes in equity prices and bond yields.

BNZ Markets Today

Jason Wong -
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US politics has dominated the overnight trading session, with a focus on Trump’s “massive” tax cuts. This has seen broad USD strength, while the NZD and AUD continue to underperform.

BNZ Markets Today

Jason Wong -
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Locals will return from the ANZAC day holiday to see markets still in a risk-on mode, buoyant from a market-friendly French Presidential election result, but that mood hasn’t followed through into the commodity currencies, which have languished.

BNZ Markets Today

Jason Wong -
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As the new week begins, the results of the French Presidential election are streaming in. A number of exit polls give centrist Macro and far-right Le Pen the nod to make the second round run-off on 7 May. This is the market-friendly outcome that the polls pointed to but there was always the chance of a rogue result. Macron should defeat Le Pen convincingly in the second round, as the other mainstream parties rally against Le Pen and offer their support for Macron.

BNZ Markets Today

Jason Wong -
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There have been various currency movements with different factors in play but the net result has been modest changes for the session. US equities are higher following some better corporate earnings results while UST yields are also higher.

BNZ Markets Today

Jason Wong -
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In a slow news day there has been a modest reversal of recent trends, with the USD and UST yields both higher. The VIX index is flat around 14½, and the S&P500 is flat after some mixed earnings results.

BNZ Markets Today

Jason Wong -
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The big news last night was the surprise call for an early UK election by PM May. This has seen GBP rocket ahead. The USD remains soft, while UST yields fall to fresh lows.

BNZ Markets Today

Jason Wong -
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Since our last daily report there has been much to digest. Ahead of the Easter break, markets were in a risk-off mode and we’ve seen that unwind as the new week begins, with no sign of war in Korea (yet) and strong China data yesterday supporting sentiment. The S&P500 is up 0.6% while the VIX index has slipped from above 16 to below 15. European markets were closed overnight.

BNZ Markets Today

Jason Wong -
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There is not a lot of news to report and trading volumes are light ahead of the Easter holidays. US-Russia relations remain in the spotlight as US Secretary of State Tillerson met with Russian officials in Moscow, with seemingly no agreement over Syria and a general lack of trust about each other’s intentions. Before the meeting President Putin said that relations with the US had worsened under Trump. North Korea also remains a focus, with President Xi and Trump conversing via the phone after Trump stepped up his aggressive tone towards North Korea.

BNZ Markets Today

Jason Wong -
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Geopolitical risks remain centre-stage, which sees softer equity markets, the VIX index up to its highest level since the US Presidential election in November, and the yen outperforming.

BNZ Markets Today

Jason Wong -
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With few data releases, geo-political risks have taken centre-stage which has seen a mild risk-off tone develop, with a higher VIX (trading within 13-14 after reaching as low as 11 last week) and lower global bond yields. US equities are up modestly, helped by a boost in energy stocks on higher oil prices.

BNZ Markets Today

Jason Wong -
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The US attack on a Syrian airfield and the US employment report were the key drivers of markets on Friday. The latter proved to be the more enduring theme, resulting in a stronger USD and higher UST yields.

BNZ Markets Today

Jason Wong -
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As we went to print yesterday the market was still digesting the FOMC minutes and the end result was a tumble in US equities (about 1%), lower UST yields and a weaker USD.

BNZ Markets Today

Jason Wong -
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A risk-on environment overnight sees US equities up 0.4% (paring gains after the FOMC minutes), and a lower the VIX index, but the NZD remains out of favour and is down on most of the crosses, although currency movements overall have been modest.

BNZ Markets Today

Jason Wong -
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There have been a few bits and pieces of news, but the markets have traded in a fairly random fashion. There has been talk of Trump resurrecting his healthcare bill in a way to placate his fellow Republican renegades which, if successful, would be a win and get his policy agenda back on track. The Fed’s Lacker, an FOMC non-voting member this year, resigned over a confidentiality breach of some five years ago. The economic data that have been released have largely been ignored.

BNZ Markets Today

Jason Wong -
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The first trading day of the second quarter shows a classic risk-off tone, with falls in equity markets, falls in global bond yields, commodity currencies underperforming and the yen heading the leaderboard.

BNZ Markets Today

Jason Wong -
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There was plenty of news flow on Friday to drive markets, but actual market movements were fairly modest, ending the first quarter on a fairly uneventful note.

BNZ Markets Today

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The USD is showing further signs of consolidation after its mid-month tumble, rising by about 0.3% on the key indices, while equity markets and US Treasury yields are slightly higher.

BNZ Markets Today

Doug Steel -

It has been a relatively quiet night in markets, despite a lot of talk around Brexit but reasonably limited market moves. US equities are little changed while US yields are lower despite a push higher in oil prices.

BNZ Markets Today

Doug Steel -
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Markets saw a strong reversal of yesterday’s moves with a strong return of risk appetite. Equities and oil are higher. The S&P500 is currently up 0.9%. The US dollar and yields have lifted.

BNZ Markets Today

Jason Wong -
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On Friday the market was focused on Trump’s health bill to repeal Obamacare. As the day wore on it became more obvious that Trump didn’t have the numbers to get the vote through the US Congress, resulting in US equities, US Treasury yields and the US dollar drifting lower

BNZ Markets Today

Jason Wong -
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Markets are in a holding pattern as it awaits the outcome of Trump’s health care bill which has yet to be voted on at the time of writing.

BNZ Markets Today

Jason Wong -
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There is little to report today, with modest market movements after yesterday’s price action. Yesterday, the S&P500 ended the day down 1.2%, its largest fall since Trump was elected and in the end recording the most days without a fall of more than 1% in 22 years. That statistic highlights how low volatility has been over recent months. The VIX index “fear” gauge is still considered historically low around the 12.6 mark.

BNZ Markets Today

Jason Wong -
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The USD and equities are under pressure as the post-election Trump rally unwinds, while US Treasury yields continue to nudge lower.

BNZ Markets Today

Doug Steel -
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It was a quite night in markets with little material news and limited market moves. Equity markets were marginally lower with the S&P and EuroStoxx50 down 0.3%. US Treasury yields are at touch lower, as are oil prices with WTI down around 1% at US$48.40/bbl.

BNZ Markets Today

Jason Wong -
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It was a very quiet end to a busy week, with modest changes in currencies, flat equity markets and UST yields drifting lower.

BNZ Markets Today

Jason Wong -
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There has been a lot of newsflow to digest over the past day or so. The falls in the USD and UST yields and rise in US equities immediately after the Fed’s rate hike yesterday have been largely sustained. Soft data releases have seen the NZD and AUD underperform, while GBP heads the leaderboard after the Bank of England monetary policy meeting.

BNZ Markets Today

Jason Wong -
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Ahead of the US FOMC meeting this morning the USD softened, the US Treasury curve flattened and equity markets were higher. After the widely anticipated 25bps increase in the Fed funds range, the USD weakened further, while rates fell across the curve.

BNZ Markets Today

Doug Steel -

An air of risk off drifted through markets overnight, ahead of the important Fed decision tomorrow morning.

Market equity markets are lower. The Euro Stoxx 50 closed down nearly 0.5%, with the US S&P 500 currently down a similar amount. US and core European yields are lower, while emerging market yields have pushed higher. Oil prices have resumed their decline.

BNZ Markets Today

Doug Steel -
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Not surprisingly, markets have been subdued ahead of major events scheduled later in the week. Equity markets are little changed, US yields nudged higher, while oil has stabilised following last week’s heavy losses.

BNZ Markets Today

Jason K. Wong -
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The focus for the market on Friday was the US employment report. A bumper result was expected and was delivered. There were no real surprises in the report, with the 235k increase in non-farm payrolls in February above published consensus forecasts of 200k, but many suspected upside risk to those estimates. The 0.2% increase in average hourly earnings was softer than expected, but revisions meant that the annual increase of 2.8% was in line.

BNZ Markets Today

Jason K. Wong -
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The low volatility environment continues, with modest currency movements, a slightly positive bias to equity markets and a modest increase in global bond rates. There are really only two things to note, the ECB policy announcement and the plunge in oil prices.

BNZ Markets Today

Jason K. Wong -
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The USD is stronger across the board, as strong employment data increased pricing for Fed hikes over the next year or two. US Treasury yields are higher, while equity markets are unperturbed and are flat.

BNZ Markets Today

Jason K. Wong -
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It has been another uneventful trading session, with global equities meeting resistance after pushing to fresh highs last week, seeing modest falls, small changes in currencies and small changes in global bond yields.

BNZ Markets Today

Jason K. Wong -
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A mild risk-off tone has pervaded the market as investors ponder the outlook under a Fed plan to step up the pace of monetary policy normalisation. USD and JPY are the best performing currencies, although movements have been modest.

BNZ Markets Today

Jason K. Wong -
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USD buying became exhausted, ending the week on a soft note, despite Yellen strongly signalling that a March rate hike was likely. The NZD ended the week on an inexplicably weak note.

BNZ Markets Today

Jason K. Wong -
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While Trump was meant to be the headline act this week with his speech to Congress, it continues to be Fed speakers that are hogging the limelight.

BNZ Markets Today

Jason K. Wong -
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It has been an action-packed 24 hours, with lots of fresh information to digest. The net result is the market bringing forward Fed hike expectations to March, a stronger USD, much stronger equity markets and higher global bond yields.

BNZ Markets Today

Doug Steel -
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There has been a host of data out of the past 24 hours, the sum of which has seen the US dollar a touch lower. The DXY is down 0.1%, at 101.00.

Rural Wrap

Milk Ahead

Doug Steel -
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- Dairy prices have recovered from last year’s lows
- But prices have eased back in 2017 so far
- EU, NZ supply; Chinese demand important from here
- Dairy prices remain a bit stretched relative to oil, grains
- Our milk price forecasts remains at $6.10 for 2016/17 and $6.00 for 2017/18
- Many moving parts, so we look at some scenarios

International dairy prices have eased back a bit so far in 2017, following their strong recovery in 2016. The GDT price index in mid-March was nearly 10% lower than where it started 2017, but more than 50% higher than a year ago.

Strategist

BNZ Strategist

Craig Ebert -
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New Zealand’s real GDP story still has many moving parts to contemplate. Construction could take a technical dip in Q1, for instance. On the other hand, dairy production is primed to rebound over the coming season. This will limit the 2017/18 milk price (we are sticking with our forecast of $6.00, with Fonterra scheduled to make its first forecast within days). Still, it represents one of many commodity income impetuses coming through. This was evident in the Q1 producer price (PPI) data, with its 4.1% y/y pace. The PPI also highlighted ongoing heat in construction inflation. In this vein, the RBNZ seems to require housing-related inflation to be/stay strong, in order to achieve its 2% CPI target. The Q1 OTI report (1 June) will likely show the terms of trade pushing 44-year highs. The Budget (25 May) will be full of stimulus but afforded by surpluses – to the extent that debt ratios keep falling. The RBNZ Financial Stability Report (31 May) will no doubt devote a lot attention to housing market excesses, especially with dairy industry vulnerabilities abated.

BNZ Strategist

Craig Ebert -
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The New Zealand economy continues to perform well and we anticipate reasonable growth ahead. High immigration is playing a role but momentum is broad-based. Still, we believe the growth phase is broadly maturing/peaking. We forecast annual NZ GDP growth to slow to 2.7% this year and 2.5% in 2018. This is after posting a creditable 3.1% expansion in 2016. Activity was modestly disrupted by the 14 November Kaikoura earthquake but, ultimately, this will add to (re)building activity. In addition to immigration, economic momentum is coming from a robust labour market and investment cycle, commodity income (including a decent recovery in dairy income), soaring tourism, and improving global growth. Generally speaking, consumer confidence is robust and business expectations strong. Indeed, they suggest we might yet be too conservative with our GDP forecasts for the coming period.

BNZ Strategist

Doug Steel -
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For a good while, we’ve been talking about a higher inflation pulse showing its hand, as soon as now. Today’s Q1 CPI backed up our view. Its key message was that core inflation is rising, indeed has poked above 2% on some annual measures. That is more important than the fact headline inflation jumped to 2.2% y/y, from 1.3% in Q4 (and 0.4% back in Q3). That said, higher headline CPI inflation is likely to bolster inflation expectations (and wage negotiations). The bigger question is whether CPI inflation will hold this firmly (even go up further?) or sag anew. The RBNZ seems to think the latter. We plump for the former. We believe the key data reports over the coming fortnight – the 28 April ANZ business survey and the 3 May Q1 labour market reports – will back up our view, that CPI inflation is firming from a fundamental perspective, rather than being once-off in nature. This entails growing pressure on the economy’s resources.

BNZ Strategist

Craig Ebert -
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In focusing on near-term GDP outcomes, it’s easy to lose sight of how the economy is doing from other perspectives. Like in terms of productivity and regional GDP – which we’ve received news on since the last Strategist – and institutional balance sheets, which we’ll get updates on tomorrow. Such supplementary information is useful, although in New Zealand’s case it has measurement issues. Yet, it’s all relevant to thinking about how fast activity can expand, for how long, before it adds pressure on resources – real and financial.

BNZ Strategist

Craig Ebert -
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Today’s Q4 GDP data undershot market and RBNZ expectations in rising 0.4% q/q. Annual growth was 2.7%. Our economic growth forecasts have not changed following today’s data as it was in line with our priors. Importantly, growth in Q4 was weighed down by some unlikely-to-be-repeated factors and Q1 indicators look better (we keep our Q1 GDP forecast at +0.7%). All this is in the context of our view that economic growth is broadly in the process of peaking.

BNZ Strategist

Craig Ebert -
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RBNZ Governor, Graeme Wheeler, made the point today that another two years’ of decent GDP growth would mean for the longest economic expansion in New Zealand in over 50 years. As much as this looks likely, in our view, it also underscores the maturing nature of this cycle. This is evidenced by capacity constraints, which are typically a precursor to increasing inflation, of which there are now signs.