ANZ Market Focus

ANZ Market Focus is a weekly report containing reviews and previews of the latest economic indicators and financial market developments.

30 May 2016: Recalibration (PDF 420kB)

The dairy sector remains the clear soft point in what is otherwise a good economic picture. Amidst strains, one facet not fully appreciated is the recalibration of cost bases; a welcome and necessary adjustment, albeit painful. Without sugar-coating the challenge, those who respond and adapt the best will emerge in the strongest positions in the future. We hold the sector in higher regard than we do many global peers that are becoming more vocal about government support. That just delays the inevitable market adjustment. It is a busy week ahead, with some backward-looking data (which we expect to be mixed) and more forward-looking gauges (including some of our propriety indicators) to focus on. This week’s GDT auction is expected to eke out a small rise.

23 May 2016: The worm has turned (for now) (PDF 416kB)

While we still have further RBNZ easing as our base case, we see little near-term urgency to cut and the market is increasingly coming around to the same view. There are challenges (low inflation being the big one), but the economy doesn’t appear to need further stimulus (demand is solid and we think inflation is turning) or kerosene on the housing fire right here and now. The Budget is the key event this week and we expect it to paint a respectable picture, with New Zealand remaining in the top echelon of economies from a fiscal perspective. The April trade balance is expected to show a surplus of similar size to that seen in March.

16 May 2016: When, not if (PDF 488kB)

While the RBNZ did not announce any additional macro-prudential measures last week, it is a question of when, not if. Housing is booming, speculative behaviour appears to be on the rise and households are leveraging (and this looks set to continue, given our analysis of some of the long-run drivers). At the same time, low inflation and global forces (slowing growth and the hunt for yield) will keep up the pressure for a lower OCR. We still see the OCR heading lower, but further down the track than June; it doesn’t pass the smell test to be upping the ante on housing and pouring petrol on the fire at the same time. This week, we see a possibility that inflation expectations may tick up slightly given petrol’s bounce, while global dairy prices look set to continue ‘bouncing along the bottom’. Consumer confidence figures will show whether consumers, like their business counterparts, remain reasonably upbeat.

9 May 2016: Riding in kanga's pouch? (PDF 388kB)

The RBA has thrown the cat amongst the pigeons by cutting and flagging more to come. We’re not buying into the notion there’s enough in that to seal the deal on a June cut from the RBNZ on fear of the NZD/AUD moving up more. There are wider considerations at play and to us the Fed will have a far greater bearing on RBNZ action than the RBA will. We still feel the RBNZ will get dragged back to the easing table more than once, but to us June is still a line-ball call; the economy doesn’t appear to need it at present. This week’s RBNZ Financial Stability Report should highlight concern, and the possibility of further macro-prudential action. Data should show respectable consumer spending, while two of our proprietary indicators (Truckometer and Monthly Inflation Gauge) will give an early signal on Q2 activity and inflation.

2 May 2016: Subtle shifts (PDF 500kB)

A June OCR cut from the RBNZ is far from a done deal, with domestic housing and economic anecdotes making it more tenuous with each passing day. That said, we still believe further easing is more likely than not, considering global vulnerabilities and NZD strength amidst currency games from other central banks. The Fed continues to drag its heels over further tightening and more RBA easing can’t be ruled out this week following the soft CPI, although recent BoJ and ECB reluctance means it is admittedly not a unanimous signal, and we are on the lookout for any subtle shifts. Domestic labour market data this week is expected to send a decent signal (notwithstanding quarterly volatility), while dairy prices are likely to lift modestly off low levels.

26 April 2016: Up, up and away (PDF 548kB)

The consensus is far from settled heading into the RBNZ’s decision this week. A case for cutting can certainly be made. However, we do not buy the argument that the RBNZ needs to respond to NZD strength, particularly as it is being driven by offshore – not local – factors. We expect policy to be left unchanged, with an easing bias retained. While we still forecast the OCR heading lower in time, our conviction that that would be the right thing for New Zealand is dwindling. Each passing day reveals more stratospheric housing anecdotes. Elsewhere this week, our Business Outlook will tell us whether the mood among businesses is holding at decent levels, as it is for consumers, while credit figures should remain strong and provide a clear reminder of some of the risks a lower OCR brings.

18 April 2016: Double, double, toil and trouble (PDF 428kB)

While we are forecasting a lower OCR, we continue to feel uneasy about the trade-offs a lower OCR will bring. Regional housing markets are booming, Auckland is coming back to the boil, and construction cost anecdotes are huge. Yet we have the (high) NZD, low inflation expectations and dairy challenges to deal with. Today’s CPI figures (low headline, but mixed details) muddy the waters. The odds of more macro-prudential measures are growing by the day, and we wonder whether tighter LVR restrictions for all investors (i.e. not just those in Auckland) are the next step. This week, dairy prices look set to continue to bounce along at low levels, while activity measures (consumer confidence, job ads, PSI) will be watched to see if they join others in pointing to moderation.

11 April 2016: Patchwork quilt (PDF 344kB)

While signs of economic moderation are emerging, it’s not enough to surprise or concern. Both demand (dairy) and supply-side (capacity) influences are at play. But with inflation already low (notwithstanding ongoing evidence of pipeline pressures), moderating growth means the OCR is still going lower. And whether that occurs in April looks set to hinge on the Q1 CPI next week. The decision is certainly “live” but at this stage we don’t think there will be enough for the Bank to pull the trigger. This week, REINZ figures are likely to show clear regional divergences but a frothy market in aggregate. They will also stand as a reminder that a lower OCR should not be taken for granted as inevitable. We still harbour concerns over the trade-offs with the RBNZ trying to get inflation up when households are re-leveraging and asset prices are surging.

4 April 2016: Jekyll and Hyde (PDF 348kB)

The economy has somewhat of a split personality at present. Some sectors are doing well, while others are not (dairy). That doesn’t look set to change any time soon. But amidst volatility and uncertainty, particularly from offshore, we see the economy navigating challenges relatively well (we see GDP growth of 2½-3% over the coming three years). This week, the QSBO should be consistent with a respectable activity backdrop but is likely to contain convoluted messages for inflation and capacity. NZX futures suggest GDT dairy prices will again bounce along the bottom, although some signals look poor. Our Truckometer and Monthly Inflation Gauge will be closely eyed for domestic momentum and inflation signals.

29 March 2016: Risk profiling (PDF 416kB)

The economy continues to perform pretty well, but most of our focus is on the risk profile. While not all risks are downside ones, we are paying particularly close attention to the flow-on impact of dairy strains and the global scene. Together with the stubbornly high NZD and structural shift in funding costs, the OCR remains biased lower. But a lower OCR still remains a view that sits a little uneasy with us, especially with re-leveraging behaviour evident, regional housing markets booming and a few stronger inflation nuances we are now detecting. Another OCR cut by June (which remains our view) shouldn’t be taken for granted. This week, our Business Outlook will be used as a gauge of domestic momentum, while building consents data should rebound.

21 March 2016: Concerted concern (PDF 368kB)

We are back on the familiar treadmill of global unease inspiring more central bank action, softer rhetoric, and markets (who are hooked on the liquidity drug as opposed to watching fundamentals) going back up. While welcome and appropriate to a degree, we are left shaking our heads over the end-game amidst negative rates, currency shenanigans, limited micro reform, high leverage, and liquidity-inspired market behaviour. Locally, the economy continues to perform well. While our core view is still additional policy easing, it is globally dependent and the trade-offs need to be weighed carefully. It is a relatively quiet week for local data, although trade data should show a small monthly surplus, in line with the usual seasonal pattern.

14 March 2016: An uneasy reality (PDF 828kB)

The OCR is still biased lower, with the global scene, still-high NZD, bank funding costs and the dairy sector some of the drivers. While we can rationalise further cuts on broader inflation grounds, we are becoming somewhat uneasy about the trade-offs. Surging debt and asset price inflation foretell problems down the track; there is no free lunch. This week, Q4 GDP and current account data should show the economy ended 2015 on a reasonable footing, while consumer confidence data will help gauge if that momentum has been sustained. Dairy prices should show more signs of stabilising (at a low level).

7 March 2016: A hat tip (PDF 348kB)

The “right here and now” still looks pretty good for the economy. However, the risk profile is skewed lower despite better nuances globally over the past week. The strong NZD is problematic, the dairy sector is severely challenged, and while the global scene has stabilised, we expect more wobbles. As such, we suspect the RBNZ will have a “bob each way” this week: acknowledging the risk profile, but not yet having cuts as its central scenario. In other data, our Truckometer and Monthly Inflation Gauge will provide a timely update on New Year activity and price trends, while housing data is likely to show clear regional dimensions.

29 February 2016: More likely than not (PDF 716kB)

Further reductions in the OCR are now more likely than not. We have pencilled in cuts for June and September. While there are several contributing factors (stubbornly high NZD, lower inflation expectations, receding export prices, dairy payout prospects) three themes have been enough to tip us into the rate cut camp: 1) a moderation in economic momentum now looks to be around the corner at a time when inflation is already low; 2) global unease – China has problems and they will be exported; and 3) a structural shift in funding costs, which, if not compensated for by monetary policy, will accentuate decelerating economic momentum. We are still constructive on the outlook for the economy but part of this is contingent on a relaxation of financial conditions via the NZD and monetary policy.

22 February 2016: Twist and shout (PDF 624kB)

Stabilisation in financial markets this past week has been welcome, but the overriding themes shaping the global backdrop and risks haven’t changed. Bouts of turbulence will return. Locally, the domestic economy continues to show resilience to global wobbles and despite a further fall in surveyed inflation expectations, this resilience, if sustained, should be enough keep the RBNZ on the side-lines. This week, data is expected to be consistent with recent themes, with net migration remaining strong and a small trade deficit likely. Early next week, our first Business Outlook for the year will be watched closely for any signs of movement.

15 February 2016: Credit where credit's due (PDF 800kB)

Weakness across credit markets is adding to – and symptomatic of – global market angst. We view price action as more akin to 2011 than 2008. New Zealand remains vulnerable to continued weakness in funding markets and commodity unease, although it is structurally far stronger than in prior periods of dislocation. We expect a bumper retail sales figure, which should cement a strong Q4 GDP result. Our eyes are more on the forward data, with consumer confidence to be perused for any offshore impact. Another weak dairy auction looks likely. We expect inflation expectations to nudge a tad lower but not sufficiently to validate the notion that low headline inflation is materially altering expectations.

8 February 2016: Leading and lagging (PDF 604kB)

Deteriorating global credit markets (funding costs are on the rise) and the ongoing weakness in export prices (beyond just dairy) is a nasty mix. It highlights tension between where key leading indicators are headed – or could be headed (financial conditions have tightened a lot but confidence is holding up) – and lagging ones (the labour market is performing well). We’re not seeing concerted signs of a turn in the former that would necessitate altered views towards the NZD and OCR, but we’re watchful. Activity data this week should hold up okay, while our Monthly Inflation Gauge comes at a favourable time to add more to the ‘diverging headline versus core’ inflation outlook debate.

1 February 2016: The tea leaves (PDF 524kB)

We can clearly tick an array of boxes across our key C’s for a lower OCR (commodity prices, China, cost of funds) but there are still numerous sticking points; credit growth is reasonable – with housing remaining solid, confidence is strong and the outlook for core inflation is disconnected at present from a low headline. We’ll change our assessment of the latter if inflation expectations start to drift lower again. Governor Wheeler’s annual sifting of the tea leaves speech is expected to be very balanced and labour market statistics are expected to show recoil and improvement. We remain lukewarm on any rebound in dairy prices eventuating anytime soon and expect this week’s GDT auction result to be soft. This will reinforce the downdraft from lower export prices and the terms of trade, which is going head-to-head with construction boosting the economy in the other direction.

25 January 2016: You gotta have faith (PDF 608kB)

The global backdrop remains top-of-mind and it is hard to see issues settling any time soon, given some structural elements at play. Amidst turbulence, the New Zealand economy continues to largely go about its business. Sentiment is up, the labour market is stabilising and there are even some hints of demand-pull inflation forces returning. We expect this week’s batch of local data to once again prove solid; strong migration, booming tourism, good tax nuances from the fiscal accounts, a good trend in building consents and strong credit growth. We expect the RBNZ to stick to the script and have faith in the framework delivered in December as opposed to react to even lower headline inflation prospects over 2016. That means a hat-tip to the possibility of the OCR moving lower if required, but not much more than that.

18 January 2016: Jitterbug (PDF 356kB)

The vibe from our Chief Economist’s recent trip to Asia has not inspired confidence regarding the region’s near-term growth prospects, although we still believe in the positive medium-term story. Risks and challenges are clear. Although the domestic economy is still chugging along well – data this week (QSBO) should be consistent with that – it reinforces that the risk profile for the OCR is still skewed lower. We continue to closely watch the five factors we listed last year (China, funding markets, domestic inflation, credit growth and NZD) to determine whether a change in our view of a stable OCR is warranted. However, for now, across real economic barometers we expect the positive vibe apparent in late 2015 to extend into 2016; the economy is looking okay.

11 January 2016: World-wary (PDF 368kB)

Our core economic assessment continues to be that the New Zealand economy is in reasonable shape and will perform modestly well over the year. However, within that overall picture there are obvious tensions and frictions, winners and under-performers. As highlighted by market volatility last week, the global scene remains the greatest source of downside risk, with China’s (mis)allocation of capital, asset valuations amidst a tightening Fed (a re-pricing of capital) and poor commodity price action front and centre. This week’s local data focuses on export commodity prices, consumer prices, the housing market and retail spending, with the Truckometer signalling whether the lift in local momentum is likely to continue into 2016.

14 December 2015: Party of five (PDF 416kB)

We have few quibbles with the RBNZ’s view of the domestic growth outlook. However, plenty of questions remain over the inflation outlook and global scene, and the resurgent NZD risks becoming a headache. Because of this, risks are skewed towards the RBNZ needing to cut again, which see us watching five things: the NZD, global funding markets, China and export prices, our Monthly Inflation Gauge and domestic credit growth. Our base case is an extended period of OCR stability, but if combinations of these factors begin to shift, then a lower OCR would be on the cards.

7 December 2015: Frankie goes to Hollywood (PDF 384kB)

The Fed is effectively locked into hike, so all eyes should be on equity markets, emerging Asia and the USD. Domestically, we continue to see economic improvement, and we have more confidence regarding prospects for 2016, global ripples aside. Low inflation and the higher-than-desired NZD are still sticking points for the RBNZ, and that keeps the OCR biased lower (and means a cut this week is a fair chance). But perhaps RBA Governor Stevens summed it up best when he told markets to “chill out” and wait to see how things unfold after Christmas. If we were the RBNZ, we’d do the same.

30 November 2015:  The other side of the fence (PDF 460kB)

A case for cutting the OCR again next week is on good grounds. However, to us, the justification for a cut as soon as next week is not that clear cut when we consider the improving domestic growth backdrop, the less dire outlook for the terms of trade, housing market considerations, ongoing falls in fixed mortgage rates, and the need for more clarity on the global scene (read US Fed). That said, a cut next week in itself wouldn’t be surprising (we still have further easing within our base-line forecasts after all); we’re simply in more of a watch and wait mode. Global dairy prices look set to bounce this week, while broader activity data should be solid.

23 November 2015: Habits of old (PDF 560kB)

Recent dairy price weakness reinforces cash flow pressure but really doesn’t add anything new; we still expect a dairy payout below Fonterra’s $4.60 estimate (we sit at $4.25-$4.50). Beyond this, we continue to detect more encouraging signs across the broader economy; witness this morning’s net migration & tourism figures. That said, with household saving turning negative again and credit growing in excess of incomes, we have borrow-and-spend type behaviour too, which is not without its risks. While this behaviour is appropriate to a degree and shows consumption smoothing, it can represent a quandary for central banks trying to drive up inflation by stimulating spending activity but seeing structural metrics deteriorate amidst housing excesses at the same time. Trade data this week should show another large monthly deficit, while business confidence (next week) will be watched to see whether the improvement theme has persisted.

16 November 2015: A question of balance (PDF 364kB)

Developments last week provided a pretty useful snapshot of where things stand for the New Zealand economy at present; improving growth prospects and benign inflation, but amongst elevated risks. However, significantly (and unlike a few months ago), risks are now no longer pointing one way (down). Our base case hasn’t changed, and the risk profile still has a modestly negative skew (courtesy of where we see the global scene), but we can now see some upside domestic growth risks too. This week is a quieter one for domestic data/events, although another drop in global dairy prices will reinforce pressures for this sector.

9 November 2015: Against the tide (PDF 432kB)

With the US Fed now odds-on to hike in December, expect further steam to be taken out of the NZD/USD, easing the RBNZ’s concerns. However, this puts more focus on Asia given USD leverage, with financial markets likely to be more on edge. While last week’s local labour market figures were soft, they shouldn’t be overplayed. Timelier indicators of the domestic economy remain consistent with a trough and improvement in economic prospects. That said, risks remain, and the dairy sector is one where we are particularly mindful, with renewed falls in prices showing tough times ahead. Ahead this week, the RBNZ’s Financial Stability Report should highlight a “sound, but with risks” message for the financial system, while a swathe of domestic data will be assessed to see whether the picture remains one of improving growth but a benign inflation backdrop.

2 November 2015: Holding it high (PDF 400kB)

Following the RBNZ’s decision to leave the OCR unchanged last week, we now find ourselves out of consensus in expecting this period on the side-lines to last into 2016, whereas the consensus is looking for a December cut. While the chance of a cut in December is material (we’d put the odds at 30%), we have faith in the economic data to show further improvement into year-end. The exception may be this week’s labour market data, although softness there should come as no surprise and it’s a lagging indicator, not a leading one. Dairy prices also look set to retrace further this week.

27 October 2015: Tea break (PDF 396kB)

Local data remains consistent with the fabled “soft landing”, with growth of around 2% expected across the economy. That’s welcome, but it also risks becoming problematic in so far as tightening financial conditions via the stronger NZD, and good news suddenly becomes ‘really good’ relative to others. We don’t see it as being problematic so far, but with key global central banks pump-priming again, and conjecture over the Fed being on hold for longer, there is the obvious risk the NZD keeps squeezing higher. Local data readings are expected to show households re-leveraging (a temporary fillip only in our eyes), and building consents on an upward trend, with business confidence perused for the forward looking pulse.

19 October 2015: Liquorice allsorts (PDF 560kB)

Recent economic developments have been something of a box of liquorice allsorts (sedate inflation, stronger NZD, balanced RBNZ Governor Wheeler comments, better fiscal numbers, the potential for a new FTA, and ongoing signs of domestic data stabilisation). But while interesting, these developments are not sufficient to alter our core economic views, with the overall story being consistent with a subdued but still reasonable economic picture. Domestic growth prospects appear to be stabilising, but sub-trend growth still beckons. The NZD is becoming increasingly relevant for monetary policy, and sedate inflation pressures are likely. This all means that we see additional monetary policy easing in time, but it is a 2016 story. This week is relatively quiet, with NZX futures prices suggesting the dairy market is taking its foot off the rebound accelerator, while net migration data should show another large net inflow.

12 October 2015: Trade up (PDF 476kB)

A theme of stabilisation / improvement continues to emerge from the domestic dataflow and we expect that to continue. We are cautious not to overplay it at this stage but it is nonetheless encouraging. Stabilisation is consistent with our expectation the RBNZ will pause at its OCR Review this month, although this week’s CPI data will likely have the final say. We expect the data to confirm sedate pressures overall, although as our Monthly Inflation Gauge hinted at today, domestic inflation needs to be watched.

5 October 2015: Stabilisation (PDF 376kB)

Recent signs of stabilisation in the domestic data flow leave us relatively comfortable with our “soft-landing” view for the New Zealand economy and an expectation for a pause by the RBNZ at the upcoming OCR Review. But that does not mean we are turning bullish. Challenges and vulnerabilities remain, and offshore developments continue to leave us cautious. Nuances from our recent international travels were notable for the lack of conviction towards the global economy’s prospects; the clearest trend seen was the lack of one. Locally the QSBO this week should be consistent with a soft / modest growth message overall, while the futures market is pointing to another solid lift in GDT prices.

28 September 2015: Soft landing (PDF 432kB)

The overarching theme from our latest synopsis on the economic outlook (to be released later today) is one of a soft economy, but one that is not on its knees. Challenges exist, but key positives remain and our projections are of the “soft-landing” variety, with easier financial conditions and a still-decent economic backbone expected to see growth accelerate later next year. That said, the risk profile is still downwardly skewed; we’re keeping an eye on both China and the weather. In data this week August consent issuance is expected to pull back after July’s surge, while the latest reads on two of our own proprietary indicators (Business Outlook and Commodity Prices) will be interesting.

21 September 2015: Game on (PDF 768kB)

Developments last week were broadly consistent with our overall economic schematic. That is, the global economy and financial markets remain wobbly, with China key to watch; the Fed will hike eventually, but not by a lot; the domestic economy is soft, but not on its knees given forward indicators are improving; and the RBNZ is unlikely to deliver four OCR cuts in a row. The main change has been the continued sharp bounce in dairy prices, although we are leaning towards price gains from here being slower and bumpier. Fonterra’s annual results for 2014/15 this week will be interesting for any further insights. August trade data this week is expected to show a climbing annual deficit.

14 September 2015: Third gear (PDF 404kB)

While the RBNZ was more dovish than we expected last week, we can’t argue with the direction it is taking. We expect a fourth OCR cut (as it signalled), although tactically don’t yet see it being delivered straight away in October given a likely near-term stabilisation in the tone of the data. That said, we remain mindful of the possibility of a sub-2.5% OCR in time given global (read China) risks. This week’s GDT auction is expected to show another circa 5-10% lift. Migration and visitor arrivals data should be robust. We won’t be getting excited by lagging Q2 GDP figures; our focus is looking forward and momentum is tracking just a tad below 2%. That is respectable, but akin to driving along the motorway in third gear.

7 September 2015: Reality check (PDF 412kB)

The tone of the commentary on the New Zealand economy has swung sharply negative of late. Certainly, for some regions and sectors it will be a difficult 18 months or so; there are real economic challenges and risks. However, some balance needs to be restored to the commentary; it is far from one-way traffic out there though we acknowledge the risk profile is clearly negative. We expect the tone of domestic data to remain mixed this week.  The RBNZ is also likely to deliver its third consecutive 25bps OCR cut, but a period of assessment beckons.

31 August 2015: Ebb and flow (PDF 692kB)

A semblance of calm has returned to markets after last week’s extreme volatility. But we are certainly left with the impression that we are not yet out of the woods. While hot spots exist (China and emerging markets), the big picture here is that the global cost of capital is set to be repriced (Fed hikes). This will see the focus increasingly shift from liquidity to growth, highlighting vulnerability and stress in some global pockets. This week, we expect another bounce in dairy prices (albeit moderate) and a couple of partial indicators to confirm another soft quarter for GDP growth in Q2.

24 August 2015: In omnia paratus (PDF 472kB)

Global concerns are front and centre, with markets roiling on ongoing Chinese growth worries and commodity price weakness. Equity markets are sliding and uncertainty is high. Our 6 C’s framework argues that the New Zealand economy has some resilience, although the risk profile for growth (and hence the NZD and OCR) is clearly skewed lower. This week a speech from RBNZ’s Spencer will get some attention, while trade data is expected to show another monthly deficit.

17 August 2015: Bungy cord (PDF 424kB)

The economy is entering a more delicate period as growth slows to “stall speed” (1-2%). We don’t see enough domestically to drive it below this rate, particularly given the role of traditional economic stabilisers (the RBNZ and the NZD). However, global risks leave us mindful, and China remains at the top of our watch list. This week, we should receive confirmation that global dairy prices have bottomed (found the bungy cord attached), but any bounce must be put in context of current depressed levels and the need for prices to recover a long way before Fonterra’s new payout estimate will be hit, let alone domestic farmer profitability restored.

10 August 2015: Washing around (PDF 368kB)

We’re still biased towards the NZD and RBNZ having more work to do in terms of their roles as economic stabilisers. However, for now, markets look set to be in for a wash-around period as they consolidate following the large moves already seen. Another leg lower needs a further clear deterioration in leading indicators and evidence that economic growth is slowing towards 1% as opposed to 2%. That is not yet on the cards in our view, despite dairy sector challenges but the risk profile is obvious. This week we’ll be watching some of our proprietary indicators closely (Truckometer, Inflation Gauge), while other data should be consistent with waning but not collapsing economic momentum.

3 August 2015: A structural overlay (PDF 432kB)

The current situation of dairy price weakness partly reflects major structural shifts in the marketplace. Stepping back from the cyclical weakness that will be reflected this week in both the GDT auction and Fonterra’s payout update (Friday), we’ve also lowered our expectation of where the milk price will sit across the cycle by 25-50 cents per kg of milk solids. We expect international milk powder prices to settle in a range of US$2,800-3,400/t (mid-point $3,100/t) in the medium term; that’s down 10-15%. A weaker NZD across the cycle will partially counterbalance the fall in incomes, but as well as responding to cyclical weakness in prices, farmers need to think about removing 25-50 cents from cost structures in a sustained fashion.

27 July 2015: A leap of faith (PDF 500kB)

We are broadly in agreement that four OCR cuts is about par given sharp falls in dairy prices, low inflation and signs of slowing momentum in the economy. However, we still see a high chance of a “pause that refreshes”, which we are pencilling in after a third RBNZ cut in September. Monetary policy is as much art as science; it’s about feeling your way. Local data this week is likely to be overshadowed by a Graeme Wheeler speech expected to give an update the Reserve Bank’s thinking about the state of the economy and inflation, but the latest read on ANZ business confidence will also be key.

20 July 2015: Hands off the panic button (PDF 596kB)

Economic conditions are softer and the OCR is headed down. However, we now find ourselves more circumspect than some on the ultimate level the OCR will reach. We’d never rule out a sub-2.5% (GFC low) cash rate but believe that requires more untoward global (China) challenges, rather than something domestic. And let’s not forget that financial conditions have loosened and monetary policy is not the only game in town – fiscal policy has a role to play.

13 July 2015: Re-benchmarking the view (PDF 412kB)

The key message from our latest synopsis on the economic outlook is one of an economy that is navigating some challenges, and now growing at a below-trend pace. However, it is not an economy that is heading off the rails, despite the obvious risks to manage. Data this week is expected to show benign inflation outcomes continuing and pressures in the dairy sector remaining intense, given further downside risks to global prices.

6 July 2015: Time to shift the fiscal stance (PDF 376kB)

As economic headwinds increase, so too does the likelihood that the NZD continues to adjust lower and last year’s 100bps of RBNZ rate hikes get completely removed – which is now our central scenario. But while monetary policy is generally expected to do the heavy lifting when growth slows, fiscal policy and local authorities have stabilising roles to play too; they have sizeable balance sheets and the ability to absorb economic weakness better than SMEs. They should be moving to a more expansionary stance with the economy slipping below trend. This week, the data is expected to be consistent with a decelerating pace of domestic growth.

29 June 2015: Back to the six C's (PDF 660kB)

Global risks are to the fore, and while we expect the Greece situation to be contained, uncertainty is high. In that environment we fall back on our six C’s framework in terms of key transmission mechanisms; there are clearly risks. Domestic momentum has slowed, but there is no need for despondency just yet – the New Zealand economy still has a lot going for it, although a lot of questions surround how dairy prices will evolve over the year ahead. We are not losing sight of the big picture; the underlying performance in the core economy is sound, the economy is in better structural shape relative to prior periods of global dislocation, and the medium-term growth story still stacks up. Signs of tensions (Auckland housing) and soft spots (dairy) will be evident in this week’s data, with forthcoming confidence gauges providing a stocktake on the pace of base momentum.

22 June 2015: Acropaplypse now (PDF 380kB)

The economy is operating below trend and one-offs such as Mother Nature’s fluctuations aren’t the sole reason. The OCR is headed lower in this environment and the NZD too. While the economic picture is more subdued in the near-term and in a cyclical sense, we’re not losing track of the bigger picture; the economy has more resilience now and we’re still constructive on the medium-term trend for growth. Trade data this week is expected to show the accounts in balance for the month, but the underlying trend is set to be one of deterioration.

15 June 2015: The first cut is the deepest (PDF 396kB)

Given the shifting tone of the economic data, we expect a follow-up cut in July and the risk is for more beyond that. This week, the main data reads are largely backward-looking, with Q1 GDP growth expected to be below trend given the impact of drought. The global dairy market is highly uncertain at present and price movements are difficult to predict, but many indicators are pointing to a modest bounce. We’ll take it, although the levels will tell the real story – they are low.

8 June 2015: Action stations (PDF 488kB)

It’s action stations for the RBNZ this week and we expect it to act on the “easier” bias evident in its April OCR Review. Our Monthly Inflation Gauge will also be a key focus this week, with it being a much more important indicator than the somewhat flawed (although still relevant) signals from inflation expectation surveys. At a time of a shifting economic risk profile, inflation data is highly important in our view. Also this week, there are a number of indicators that will update us on whether or not evidence is mounting that the economy is showing less pep.

2 June 2015: Less peppy (PDF 444kB)

Challenges in the dairy sector are clear and business sentiment is easing off high levels. But the economy is not weak. It is just less peppy. Nevertheless, at a time of low core inflation and an economy growing around trend (which suggests inflation pressures won’t be increasing strongly anytime soon) we still believe the path of least regret for the RBNZ is to lower the OCR, particularly when a lower NZD is desired. It is a relatively quiet domestic economic calendar this week, and dairy prices may bounce modestly at this week’s GDT auction but the level (low) will remain the telling story. The main focus is likely to be offshore.

25 May 2015: Cash flow strain (PDF 692kB)

The Budget contained few major surprises. A sensible policy prescription (with a few tweaks) remains in place and the Government is attempting to maintain a steady hand on the economic tiller. Notably, the market reacted aggressively to some third-tier inflation data, highlighting stretched market positioning. Downside risks for the economy are expected to be on show this week, with Fonterra expected to announce a 2015/16 opening milk price of between $5 and $5.25/kg MS. This will reinforce considerable cash flow pressures in the dairy sector and the economy’s ultimate need for a lower NZD, which we believe monetary policy easing by the RBNZ will help achieve.

18 May 2015: Attacked on multiple fronts (PDF 508kB)

Suddenly, policy-makers are taking a multi-pronged approach to tackling Auckland housing demand. The speed and apparent coordination of measures is notable. While uncertainty surrounds the precise impact, we suspect the effect will be stark given the extent of house price movements of late. At a time of other challenges (dairy) and low inflation, it reinforces our view that the OCR is heading lower, and sooner rather than later. Focus this week now shifts to the Budget, while the next GDT auction looks likely to show that prices may have bottomed for now.

11 May 2015: Sleeping beauty (PDF 468kB)

We now expect the RBNZ to cut the OCR by 25bps in June and July. While growth is still solid, inflation is low – further reinforced by our Monthly Inflation Gauge this morning – and risks are rising. And after all, the RBNZ has an inflation target and not a growth or a housing one. At a time when the economy’s risk profile is shifting (dairy, China, etc) and core inflation is low, cutting the OCR is a cheap insurance policy to manage emerging risks. The RBNZ’s Financial Stability Report this week will focus on housing and dairy sector concerns, with additional prudential measures to tackle the former possibly mooted, although nothing concrete is likely just yet. Data on housing, retail spending and broader activity growth should be solid this week.

4 May 2015: Opening the door (PDF 528kB)

The RBNZ has softened its tone as expected although it looks an easier bias as opposed to an easing one; they still expect core inflation to move up. We’re not yet convinced on that front and more subdued core readings from our Monthly Inflation Gauge would see us move off the fence and call the OCR lower. Labour market data this week should paint a solid picture, while the risks of further price falls at the next GlobalDairyTrade auction are non-trivial. Eyes will also be on the RBA with our Australian colleagues expecting a 25bps cut.

28 April 2015: A softer stance (PDF 736kB)

The RBNZ will soften its tone this week, moving to the dovish side of neutral, although stopping short of an outright easing bias. It implicitly flagged this in a speech last week. Reading between the lines, the RBNZ still look to be fixated with cyclical forces suppressing inflation though. We don’t think structural forces are dominating, but they are certainly playing a non-trivial role. Lacking reliable estimates of where inflation expectations actually sit, our Monthly Inflation Gauge will be key over the coming months; more subdued core reads and a high NZD will up the ante on an actual reassessment of OCR settings as opposed to just reassessing the possibility (on the assumption a prudential response to housing eventuates). Meanwhile, the tone of domestic data is expected to remain solid.

20 April 2015: Throwing down the gauntlet (PDF 412kB)

Subdued headline CPI inflation amidst tensions (strong housing) but very soft core measures will keep the debate alive over what will dominate the trajectory for inflation going forward; traditional demand pull factors, a confluence of one-offs or whether or not we are amidst a structural shift. Today’s data provided pieces of each. Plaudits to the RBNZ for putting the tax treatment of housing back on the public agenda. It is a debate that we feel needs frank and honest dialogue. But we also wonder whether the better enforcement of current rules would be an easy first step that could shift sentiment. Left alone, the Auckland housing market is creating considerable risks to the outlook. This week, data is likely to show another solid net inflow of migrants, while RBNZ Assistant Governor McDermott speaks on inflation.

13 April 2015: A mixed bag (PDF 576kB)

We are now closer to ticking off three of our “four prongs” needed before OCR cuts become a realistic proposition. Our monthly inflation gauge for March will give an idea of the skew of risks surrounding the Q1 CPI – subdued core inflation is the fourth and most critical “prong”. Ahead of the CPI data next week, the focus this week will be on the QSBO, which should be consistent with a solid pace of underlying demand, along with ongoing evidence of capacity pressures. This week’s GDT auction will be critical for determining where the opening 2015/16 milk price will be pitched in May. We’re still picking $5.75/kg MS, which means cash-flow over 2H 2015 will be very tight.

7 April 2015: In our strength lies weakness (PDF 468kB)

We continue to feel that the majority of risks for New Zealand’s decent economic story lie offshore. However, two domestic tension points exist – weak dairy incomes and rampant Auckland house price growth. A NZD/AUD that is flirting with parity is another focal point. It is a quiet week for local data, with the ANZ Truckometer and Crown Financial Statements the only events on the calendar.

30 March 2015: Still ahead of the run-rate (PDF 412kB)

The New Zealand economy continues to be buffeted by a range of developments (both domestic and offshore) that reinforce the risks and tensions within the outlook. Amidst it all, the economy continues to do well. This week, the ANZ Business Outlook will provide a timely update on the business mood, while building consent issuance should rebound from a January lull. A weak GlobalDairyTrade auction result looks in store, which will keep the rural sector nervous over prospects for the 2015/16 payout.

23 March 2015: Outperformance amid tension (PDF 460kB)

There is no doubting the New Zealand economy remains an outperformer globally. Yet frictions, tensions and wariness remain the order of the day, and mixed signals continue to prevail. That picture won’t be changing any time soon. We’re mindful of global-centric tensions but still believe the collection of small microeconomic-fostered initiatives mean the New Zealand economy has greater insulation against global risks and challenges than normal. The domestic data calendar is light this week. We expect a modest monthly trade surplus (largely seasonal) although not sufficiently large to avert a further widening in the annual deficit.

16 March 2015: Divergence and convergence (PDF 388kB)

Strong economies don’t tend to have weak currencies and New Zealand – in the words of the RBNZ – remains “strong”. With more central banks cutting interest rates in Asia last week, the NZD is set to remain elevated. Risks are tilted towards a fall at this week’s GlobalDairyTrade auction given increased supply on offer, and the expectation of reduced demand. Local GDP data is expected to confirm the economy ended 2014 on a solid note, with the annual current account deficit climbing above 3% of GDP. Net migration inflows are expected to remain strong, with a surge in visitor arrivals underpinned by the Chinese New Year and Cricket World Cup. Consumer confidence data provide a gauge for the household pulse.

9 March 2015: Enough is enough (PDF 408kB)

Prudential policy changes aimed at property investors could carry more punch than LVR restrictions, particularly in Auckland. While aimed at financial stability, the implications for the OCR are clear; low for longer, and potentially a rate cut. This is not our central scenario – a lot of other boxes would need to be ticked. Outside of the RBNZ, key this week will be our Monthly Inflation Gauge, which has been picking core inflation well. Housing market data should show a climb in annual house price inflation, with a clear Auckland versus the rest of New Zealand divide – for now. We expect modest retail spending growth, while the Truckometer and sentiment gauges will shed light on the pace of momentum across the economy.

2 March 2015: RBA follow-on (PDF 392kB)

Despite New Zealand growth prospects remaining robust, tension points remain (high NZD and the Auckland property market). This has us musing over a prudential policy response. The RBNZ doesn’t necessarily need to bite; a threatening bark – airing the options – could potentially curb the investor market’s enthusiasm. A further climb is expected in this week’s GlobalDairyTrade auction and our focus is also on how well the remainder of the commodity export basket is faring. Inputs for Q4 GDP are expected to depict a strong end to last year.

23 February 2015: Farming the strike (PDF 508kB)

The New Zealand economy continues to punch above its weight, and downside risks have also subsided somewhat. That’s a far cry from saying they’re gone. Global nuances are a little better and dairy prices are lifting nicely, though the latter is partly drought-related, which is hardly something to celebrate and we note other soft commodity prices are falling. We continue to take a constructive stance locally, taking the lead from our forward indicators, with consumer confidence and our Truckometer both flagging a good start to 2015. This week’s Business Outlook will provide a crucial read on the business side of the sentiment equation. Other local data – notably migration and building consents – are expected to show solidity.

16 February 2015: Parched (PDF 376kB)

We continue to take a cautious view towards the global scene despite better nuances of late, viewing it as the main downside risk to an otherwise solid-looking local picture. Drought conditions are expected to knock at least 0.5% off GDP growth but we’ve been through such episodes before; it’s when they coincide with global developments that we’re wary. The knock to agriculture this year is not solely drought related; a portion reflects natural responses to broader pricing signals. This week we expect to see another solid price lift at the global dairy auction. Consumer sentiment and job ads will be closely perused for signals as regards the economy’s underlying momentum at the start of 2015.

9 February 2015: Parity possibility (PDF 392kB)

The RBNZ remained on message last week, reaffirming a stable OCR is the “most prudent option”. The global scene is evolving quickly, with last week’s rate cuts by our two largest trading partners a clear illustration that issues are not confined to Europe; by our count 17 central banks have cut so far this year. While the door is ajar to a prospective OCR cut this seems a long way off given the rock-solid nature of the domestic expansion. Forthcoming sentiment and real-time activity gauges will be looked to for corroboration, with the ANZ Truckometer well placed to identify a fuel price impact. Lower fuel prices are expected to deliver a mild increase in retail values, but a strong Q4 result is expected for retail volumes and non-fuel spending. Housing market data is expected to show a strengthening in annual house price inflation, with our Monthly Inflation Gauge to provide a real-time read on whether pricing pressure remains confined to the housing market.

2 February 2015: Risky business (PDF 400kB)

We’re still upbeat on New Zealand’s economic story but increasingly circumspect about the global scene; risks abound. That’s necessitated an easing in financial conditions, which we view as entirely appropriate; the RBNZ can’t be dictated to by housing alone – they have an inflation target and low inflation gives them the latitude to respond. A neutral stance is appropriate; we can’t see what the fuss is about. While risks abound, labour market data is expected to confirm strong local momentum; this ship will take a bit of turning. Dairy prices are expected to continue nudging upwards, but it’s a long journey getting the payout to breakeven status for farmers.

26 January 2015: On the fence (PDF 408kB)

Inflation remains out for the count, with our forecasts signalling deflation in this quarter and next and annual CPI sub-1% over 2015. But the continued run of low and lower core inflation measures is hard to ignore. While it is too soon to consign the central bank rule book to the dustbin, some standard rules of thumb are in need of a serious rethink and policymakers need to be increasingly flexible. We’re still lukewarm on the global front; amidst central bank “bazooka” moves, markets remain on edge. On the local data front we expect continued solidity when looking at the broad trends; a Goldilocks reign of good growth and low inflation beckons.

20 January 2015: Tightening bias on borrowed time (PDF 408kB)

A flat-lined OCR profile until late 2016 is now our central scenario. While we can point to some obvious factors urging a more cautious outlook (a higher TWI, an even lower dairy payout, weak CPI), it is the global scene that has us most wary. Price action is becoming more disconcerting. Monetary policy and central bank action look to be losing their efficacy to keep volatility low; a partial condition for growth to occur. In a coupled world you can’t sustain both currency misalignment from fundamentals and material yield divergences; the rubber band for one or the other invariably becomes tight. An altered risk profile is now reflected in our expectations regarding monetary policy settings.

12 January 2015: Oil be back (PDF 356kB)

Lower petrol prices are diluting the negative impact of lower dairy prices on the terms trade, providing a potential windfall to consumers in excess of $1 billion and set to drive headline inflation towards zero. The latter is further pushing out expectations for an OCR increase. We concur with this, though it is the structural aspect around non-tradable inflation that we are watching more closely which when combined with a high NZD and global wobbles suggest a flat-lined OCR profile is more appropriate than trying to pick the next move. We expect a ho-hum rise in Christmas retail spending on Wednesday. Housing market data is likely to have ended 2014 on a firming note, while readings from the Truckometer will provide insights on the path of economic activity.

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