ANZ Market Focus

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

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.

15 December 2014: Last but not least (PDF 460kB)

The RBNZ might be perplexed over the NZD reaction to last week’s no-change decision but a currency is hardly going to stand still if you openly discuss a tightening bias in this global environment. “If you can’t say anything nice, don’t say anything at all” might be a good central bank mantra in these times. The domestic growth profile won’t do it, unless the dairy story spills over into 2015/16, so we’re looking for an offshore catalyst. Despite slippage, the HYEFU is expected to show the fiscal accounts remaining on an improving trajectory. Q3 GDP and current account data is expected to show the expansion continuing at a modest clip. More forward-looking data is expected to remain broadly strong.

8 December 2014: Poker faced (PDF 456kB)

The OCR is higher than it needs to be to deliver on-target CPI inflation; the fact inflation is now lower prior to the RBNZ hiking rates is pretty telling. While our central scenario is for modest lifts in the OCR, we can now envisage a scenario where the next move in the OCR could be a cut. It’s only a scenario at present but the reality is simple; one year of sub-par dairy incomes are manageable; two years becomes problematic and will necessitate the shock absorbers (OCR and NZD) adjusting. GDT price action is still very mixed, but we expect Fonterra to bite the bullet this week and cut the 2014/15 payout. Its prospects for 2015/16 that remain key and prices need to lift an awful long way to get a payout close to breakeven.

1 December 2014: Top and tailing (PDF 388kB)

The term “recovery” needs to be dropped from commentators vocabulary; we’re in an expansion. While pessimists point to a host of events that could potentially impede the expansion, there are also important support factors remaining, and a balance needs to be struck. Partial data readings for Q3 GDP are expected to confirm an uneven pace of expansion, with domestic demand picking up the growth baton. While the New Zealand economy has made structural progress in purging some of its pre-GFC excesses, tweaking the income generation lever holds the key to prolonging the expansion. While the drop in dairy prices has justifiably taken the limelight, we’ll be looking at this week’s commodity price data for more signals across other areas.

24 November 2014: Chinese checkers (PDF 556kB)

Last week’s comment by Chinese Premiere Xi Jinping – NZ will have to worry about…more Chinese demand that you can possibly supply – reinforces the importance of execution dominating opportunity; the latter is taken care of, it’s the former that holds the key. Anyone can talk up opportunities; executing around them is a different dynamic. We like what we see on some levels. This week’s business confidence data will provide a timely stocktake of the business mood. Despite a strong domestic demand environment, readings for actual and surveyed inflation are likely to remain contained. Residential building consent data is expected to show rebounding activity from the election-related lull.

17 November 2014: Gangnam style (PDF 372kB)

The economy is enjoying renewed momentum now the election is out of the way and news of a FTA with Korea – whilst small and hardly game changing – is another micro style initiative that will add further medium-term economic muscle. Although inflation is low, the RBNZ is not willing to risk a second wind in the housing market. LVR restrictions are not going anywhere any time soon. One risk to the Goldilocks story in 2015 is cashflow into the dairy sector; we’re not expecting much uplift at this week’s GDT auction.  Partial activity prints for Q3 GDP are arriving, and are expected to show moderate rates of growth. The release of the new batch of National accounts data is unlikely to alter assessments of economy-wide capacity pressure, but will improve national debt and deficit metrics. We’ll take it.

10 November 2014: On borrowed time (PDF 484kB)

High-LVR lending restrictions are on borrowed time, despite being put in to mitigate obvious risks. We would not be surprised to see some sort of guidance as to their relaxation in this week’s Financial Stability Report. Housing market data is expected to confirm a further slowing in annual house price inflation, but with pockets of strength still evident. Sentiment measures are expected to convey a strong demand-side pace of expansion, with real-time data readings from the Truckometer providing useful insights.

3 November 2014: Price tensions (PDF 424kB)

The RBNZ is on hold; a dovish tilt for sure but amidst an implicit tightening bias. The failure of the NZD to have a decent crack lower looks telling: elevated ranges beckon. If price tension can’t be created over the next two dairy auctions with limited supply then this would be a worrying sign, and signal an even lower forecast milk price. Our internal anecdotes have been more positive for forestry and the wider pastoral sector of late, with October commodity prices to provide a stocktake. Labour market data, whilst lagging, is expected to confirm a stepping up of the supply side, with annual wage inflation expected to be moderate.

28 October 2014: Trick or treat (PDF 384kB)

Last week, we formally shifted our OCR call, now anticipating that the RBNZ will remain on hold for most of 2015, before a 25bps hike in December. The next move in rates need not be up, though our central scenario is tilted that way. The evolution of low inflation outturns look increasingly more structural, assisted by subdued credit growth and better potential growth. Amidst market volatility, a fickle global scene and lower dairy commodity prices, business confidence will be closely perused for economic guidance. Stepping back, the economy looks to be in a low inflation and solid growth sweet spot.

20 October 2014: Doing the time warp again (PDF 396kB)

Recent financial market volatility is a reminder that New Zealand’s key point of vulnerability is the global scene, though we’ll wait for something more concrete before adjusting our forecasts. Perhaps the most worrying aspect of last week was not the volatility itself, but policymakers’ unhelpfully confused response to parts of it; that’s a warning shot as to how the eventual unwind of stimulus could unfold. Here at home, consistent with what we have recently observed offshore, a benign Q3 CPI inflation print is expected this week. The relative strength of the New Zealand economy is likely to result in a further strengthening in net immigration, although falls in export commodity prices are starting to catch up with our external accounts and are a headwind to economic activity.

13 October 2014: Share wear (PDF 456kB)

The fickle global scene and recent financial market volatility have us watchful. The New Zealand economy has points of vulnerability and is not immune from a global downturn. There is a growing possibility the RBNZ will be on hold for all of 2015. While the risk profile is more symmetrical than it was a few months ago, the New Zealand economy still has latent sources of strength. Apart from the broader global scene, prospects for the dairy industry continue to dominate as a major downside risk in light of the halving of dairy auction prices since February. This week’s auction is expected to be finely balanced, with reduced supply on offer. Sentiment measures for September are expected to show an election-related lull, with October consumer confidence looked at for signs of a post-election bounce. While a lower NZD is clearly in the interests of the wider export sector, it is of less benefit to consumers. Forthcoming inflation prints will show how the gain and pain is distributed.

6 October 2014: The wmpire strikes back (PDF 484kB)

Prospects for the dairy industry continue to dominate as a major downside risk for the economy. While a gargantuan income loss is pending, and there will be cash-flow issues for some, it’s far from terminal for the economy, with pep from other areas. Reasonable growth still beckons. However, we can’t stress enough how important prospects for the 2015/16 year dairy payout are going to be; one year of negative cash-flow is challenging – but manageable; two years is problematic. Our currency and OCR projections are under review as we reflect on the risk profile and prospects for trend as opposed to above trend growth. We expect this week’s QSBO to show an election-related dip, but for details to remain solid under the bonnet. Moderate rates of retail spending suggest that households have learnt some harsh lessons from the GFC, whereas the Truckometer will help reveal whether the NZ economy is approaching a turning point.

29 September 2014: It's moo-ments like these you need ... (PDF 444kB)

A lower forecast for the 2014/15 dairy payout looks set to deliver a $5bn hit to dairy incomes. This, along with a stronger USD trend and RBNZ comments, has put the NZD on the skids. We expect some volatility over the next few dairy auctions, with a sharp rise in auction prices from early next year needed to prevent another Fonterra payout estimate downgrade. Despite the downgrade we’re still pencilling in 3% GDP growth but there are clearly significant risks to manage. Business confidence readings over the next few months will provide a timely stock-take of the extent to which the weaker commodity price backdrop, NZD falls, and electoral concerns are having an impact.

22 September 2014: Back to business (PDF 556kB)

Talk of a “downturn” following a growth peak is unjustified; the cycle is simply maturing from strong growth off lows, to moderate growth off good levels. The election result is expected to have a minimal impact on the economic outlook. Wednesday’s Fonterra’s annual report and merchandise trade data ensure that the focus this week will be on the impact of weakening commodity export prices. We expect Fonterra to trim their 2014/15 milk price forecast to the mid $5’s from $6, which will deliver a circa $5bn cut to dairy revenues from last season.

15 September 2014: Election inflection (PDF 436kB)

Economic overview: It is entirely appropriate that the Reserve Bank is on an extended sabbatical. There are question marks both around the growth profile, but more importantly, around the flow-through from traditional drivers into inflation. We are leaning towards pushing our forecast for the next hike out to June 2015 (from March) but the falling NZD and strengthening labour market mean the inflation projections could look quite different six months from now, with a lot of skew around the central scenario. This week brings high-profile but dated Q2 releases. The GlobalDairyTrade auction may be more market-moving – we see more downside risk. 

8 September 2014: Up and down the billboard (PDF 572kB)

Economic overview: The economy is transitioning to a more moderate growth trajectory, with data over next few months expected to confirm a slowing in growth momentum. We reiterate that this is far from the sudden stop that pessimists believe is occurring. Lower dairy prices have taken off some of the gloss, and there are risks to manage but there is still much to crow about, and the New Zealand economy looks to be in better shape under the bonnet than it did a few years ago. Brace for continued mixed messages across the data-flow; we’re not excited by this – that’s simply consistent with an economy evolving into a different stage of an expansion. 

1 September 2014: Spring chicken (PDF 484kB)

Economic overview: The risk profile for the economy is more marked than it was over the first six months of the year. This requires monitoring, but Chicken Little can stay at home. Looking beyond immediate risks to manage, we note that prospects for the trend rate of growth are looking good. In particular, we remain positive on productivity. It is average growth over the cycle that determines New Zealand’s aggregate long-term wellbeing, rather than the ebbs and flows, uncomfortable as they may be to live through. In terms of those attention-grabbing ebbs and flows, this week’s data brings another read on commodity prices generally and dairy in particular, and further pieces of the puzzle regarding Q2 GDP. We’re expecting lukewarm stuff on all fronts.

25 August 2014: Poll dancing (PDF 640kB)

Economic overview: Politics is normally an economic sideshow, but as we head into the election it’s becoming more relevant; we’ve seen global instances of political wrangling impacting on real economies. Political jousting aside we can see common ground between the major political parties; there is broad agreement over the big picture stuff and we like some of policy initiatives from the challengers.  Sentiment can be thrown around by the vagaries of politics – the political fringes and baubles of coalition is the real risk. However, for now businesses seem to be following the Nike script. Business sentiment will be closely eyed over the months ahead to see if this remains the case. Local data is likely to show the impact of lower commodity prices.

18 August 2014: Bees to the honey pot (PDF 464kB)

Economic overview: Annual CPI inflation looks to be heading below 1.5%, which is remarkable when one considers the stage of the economic cycle and lift in traditional inflation indicators. There's a lot going on, but in our view, the key reasons are the high NZD, low global inflation pressures, and strong productivity growth. It all takes pressure off interest rates. Domestically a busy data week includes a fiscal update, another dairy auction, job ads, migration, and consumer confidence. Such mixed signals will be consistent with an economy growing solidly; albeit at a canter rather than a gallop.

11 August 2014: Russian fudge (PDF 580kB)

Economic overview: New Zealand has been handed what could be a poisoned chalice in the form of being excluded from Russia's wide-ranging retaliatory bans on food imports. The latest Russian wildcard, in the context of falling dairy auction prices, rising geopolitical tensions, and pending normalisation in US monetary policy highlight that offshore risks dominate the economic landscape. In a light week for domestic data, a strong reading for Q2 retail trade volumes is expected, although the housing market looks to be going off the boil. Moderate readings are expected for manufacturing sentiment, with the ANZ Truckometer providing a timelier steer on momentum.

4 August 2014: Within spitting distance (PDF 940kB)

Economic overview: Our focus is increasingly on the US Federal Reserve, which is running out of excuses to not start normalising interest rates sooner rather than later. This will be a key influence on the NZD's direction but carries risks of less-welcome developments. Here at home, a lower Fonterra milk price forecast for 2014/15, whilst not out of the blue, took yet more of the shine off the stellar NZ outlook. Nonetheless a still-strong domestic demand backdrop should be reaffirmed by a strong set of Q2 employment prints. Wage inflation is expected to be low, with lifts in productivity delivering a more favourable activity and inflation trade-off. Forthcoming retail spending looks set to continue to undershoot growth in labour incomes.

28 July 2014: Time for a cuppa (PDF 716kB)

Economic overview: The RBNZ is now in a "period of assessment" as it contemplates the inflation outlook. While we're expecting solid near-term employment figures, looking further out the challenge (or luxury) for the RBNZ is going to be sub-1.5% inflation in the back half of the year. So we're taking a 2015 view still for the resumption in the tightening cycle. In a light week for domestic events, Fonterra are expected to announce a trimming of their milk price forecast for 2014/15. Offshore events hold the key to broad NZD direction, but weaker commodity export prices will weigh.

21 July 2014: On the horns of a dilemma (PDF 460kB)

Economic overview: The lack of a smoking gun on the pricing side of the economy, a NZD in the stratosphere, and rapidly declining commodity export prices suggest this week's July OCR Review should be a finely balanced decision. It won't be, given the RBNZ's forward guidance (and booming migration); a hike looks firmly odds-on but a sabbatical should follow until early next year. Consumers have remained upbeat so far, with business sentiment the next cab off the rank. Falling commodity prices are expected to start catching up with the strong merchandise trade position.

14 July 2014: Price and prejudice (PDF 552kB)

Economic overview: The NZ story continues to resonate with overseas investors, with the NZD TWI hovering around post float highs despite falling commodity export prices. A July OCR hike appears odds on despite the elevated NZD. We expect a contained headline inflation print though will be watching for signs of increasing capacity pressures flowing into pricing pockets. Risks are tilted towards a further fall in dairy prices from this week's GlobalDairyTrade auction given higher near-term supply.

7 July 2014: Commodity conundrum (PDF 532kB)

Economic overview: Commodity prices are on the way down, but the NZD so far has failed to budge, illustrating the widespread support factors underpinning the NZ economy. The local focus is on tomorrow's QSBO, which despite signs of slippage, is expected to depict a still-healthy pace of expansion. We will continue to closely monitor our activity gauges for signs of a turning point, with Thursday's Truckometer the next cab off the rank. Card spending is expected to take a breather, whereas the Crown Financial Statements are likely to continue to track close to the Budget Forecasts.

30 June 2014: Giddy heights (PDF 608kB)

Economics overview: Financial conditions have tightened markedly, and it's not just about the high NZD and higher interest rates. It's not one-way traffic but one has to sit up and take note that financial conditions are flagging a moderation in growth from 5 to 3%. Of course, this is exactly the Reserve Bank's forecast, and is much more in line with the sustainable growth rate of the economy. Now the attention turns to whether a soft landing can be achieved. Forthcoming sentiment readings will help gauge the impact of the tightening in monetary conditions on the economy. We'll also receive key data on commodity prices, which have been looking decidedly fragile of late.

23 June 2014: Full house (PDF 416kB)

Economics overview: Despite a number of comments to the contrary, the NZ economy is far from a one or two-trick pony, with a number of support factors underpinning the expansion, and most regions doing very nicely. A July OCR hike is still more likely than not. The next few months are likely to show a commodity price impact on export receipts, but we expect this week's trade data to show a widening annual trade surplus. A pullback in overall residential consent issuance is on the cards, but this should not detract from strengthening signs evident in the non-residential sector. With consumers having largely brushed off the impact of 75bps in OCR hikes, forthcoming readings for business sentiment will be key, with the longevity of the expansion depending on whether firms convert upbeat employment and investment intentions into reality.

16 June 2014: Three under the belt (PDF 456kB)

Economics overview: The RBNZ has three hikes under its belt and we think they now need a reason to pause (as opposed to a reason to go) in July. We're still picking the NZD to remain strong which creates some gestation issues but they have a job to do; get it done.

We expect a continued strong focus from the Bank on getting the curve working in its favour. That's NZD supportive for now but will ultimately dampen the rates cycle and NZD over time. With commodity prices a key downside risk, this week's GDT auction is crucial.

9 June 2014: Graeme, set and match (PDF 416kB)

Economics overview: We're taking a glass half full view of the modest slowing evident in economic momentum and mixed economic signals; that's consistent with an economy transitioning into a more sustainable growth path and we'll take the long game (the length of the expansion) over the short game any day. With the economy having started 2014 with a bang, the focus is on the pace of forward momentum; we're seeing moderation but it's still solid growth. We expect this week's array of indicators to remain robust but consistent with strong but no longer stellar growth.

26 May 2014: Ebb and (milk) flow (PDF 448kB)

Economics overview: The latest read on business confidence and the Fonterra milk payout announcement dominate this week's local events. A small cut to the record 2013/14 dairy payout and a conservative opening forecast for 2014/15 are in prospect, which will take away some of the cream but still leave cash-flow strong. Business confidence will be examined for signs of an impact from the higher OCR. Despite a fall in April residential consent issuance looking likely, the outlook is for a further strengthening in construction sector activity.

19 May 2014: Delivering the basics (PDF 476kB)

Economics overview: The 2014 Budget looks to have gone down in a similar vein to the 2013 edition: we didn't expect much, received little, and life goes on. Yes, some small treats were on offer, but essentially it was a case of business as usual with an appropriate focus on fiscal responsibility. However, the Government does appear to have sliced future surpluses as wafer-thin as they dared, which provides little buffer against adverse economic shocks. In the here and now, our focus remains on the commodity price outlook. This week's dairy auction is likely to be pivotal, although we are watching the wider commodity space.

12 May 2014: Surplus clearance (PDF 468kB)

Economics overview: The good news story across the economy continues to percolate, though we still view the economic expansion as fraught with frictions and tensions. We continue to highlight the importance of microeconomic developments in such an environment.

The RBNZ is expected to reaffirm the soundness of the financial system, although the current global environment is providing headaches to the export sector via an elevated NZD. The Budget will toe the tight fiscal line, a necessary pre-requisite for capping OCR increases and improving nationwide saving. An emerging area to watch is signs of decline in other soft commodities: forestry prices have been the latest to follow dairy. Watch this space.

5 May 2014: More bouquets than brick-bats (PDF 408kB)

Economics overview: We're pro compulsory saving – some bouquets to the Labour Party monetary policy wise last week – but we hand out a brick-bat for thinking KiwiSaver should be used for short-term demand management. Net on net we see more we like than we don't, and that leads us to remind readers that amongst all the political hurly-burly, New Zealand has one of the world's better-functioning political systems. This week's labour market report is expected to show lifting employment, but contained generalised wage inflation. Small falls are likely from this week's dairy auction, with offsetting movements expected. A moderate lift is expected for card spending.

28 April 2014: Business as usual (PDF 388kB)

Economic overview: Business as usual remains the order of the day, with the economy in the midst of a strong pace of expansion. Various challenges remain but we remain optimistic some unheralded facets – the likes of better productivity growth and microeconomic tweaks et al, will help underpin an elongated expansion. Wednesday's business confidence data will show whether the mood remains upbeat, with the RBNZ having started removing policy stimulus. A sizeable March trade surplus is expected, with commodity price data expected to provide insights on how wider commodity exporters are faring. Moderate credit growth augurs well for the duration of the expansion.

22 April 2014: Chicken Little (PDF 328kB)

Economic overview: The "bubble" is not about to burst, and we don't find "Chicken Little" style commentary useful. That said, New Zealand is facing challenges, as we have highlighted many times before, and with euphoria sky high according to both business and consumer confidence surveys, it's perhaps timely to remind readers of that. New Zealand is navigating a potent combination of legacy issues from the last business cycle (a weak balance sheet and high debt levels) and opportunity (high commodity prices and growing exposure to Asia) – while addressing a fairly urgent and demanding to-do list in terms of housing shortages and a city rebuild along the way. It's an outlook fraught with tensions and frictions, and a bun-fight for resources. Net immigration is set to touch a decade high.

14 April 2014: Price of progress (PDF 368kB)

Economic overview: The economy continues to display a strong pace of expansion necessitating the continued withdrawal of policy stimulus. We're closely watching the credit channel of monetary policy with aggressive competition supporting borrowers despite the withdrawal of monetary policy stimulus. This is tilting us towards a hike in July as well (we're currently calling April and June before a pause).

7 April 2014: Tip-top and dairy free (PDF 380kB)

Economic overview: Reasonable declines in dairy prices may be getting a lot of attention but we're mindful that prices are still historically high. The outlook for the 2014/15 dairy pay-out still looks good, and NZ's commodity story is far from a one-shot dairy wonder. Therefore we're not expecting an aggressive turn in the goods terms of trade. Looking at the week ahead, business confidence readings are expected to confirm a strong pace of expansion. The onus is on supply-side capacity to meet the requirements posed by a strengthening and broad-based expansion. We're encouraged by what we're seeing on the investment and productivity front, though we still have a miss-match: demand is growing at 3+ percent and supply at less than a 3% annual pace.

31 March 2014: Reaping what we’ve sown (PDF 384kB)

Economic overview: The domestic expansion is broadening, which ups the ante on the supply-side of the economy to follow suit. The latter is also needed to soften the blow to a tradable sector grappling with an elevated NZD. We're still banging the drum about the importance of productivity growth. Looking at the week ahead, moderate increases are expected for economy-wide credit, with commodity price data providing a steer on producer incomes over the course of the year.

24 March 2014: Seizing the opportunity (PDF 340kB)

Economic overview: 2014 is shaping up as a better year than 2013, and we're encouraged by signs of improvement on the productivity front. Efficiency gains need to be sustained for the inflation genie to remain bottled and the economic expansion to extend. We're constructive on the outlook for productivity. In a light week for domestic data, one of the major support factors for the economy will be in evidence: the historically high goods terms of trade are expected to have delivered a positive trade surplus in February.

17 March 2014: Stride and tested (PDF 356kB)

Economic overview: With the RBNZ having started to withdraw monetary stimulus, the focus is shifting to how swiftly it will be done and how much work they will have to do. GDP and current account data for Q4 are unlikely to knock the NZD off its perch, with early 2014 data expected to confirm a broadening of the economic expansion. Sentiment data over the next few months will be examined closely for signs of an interest rate impact; we're expecting a turn but not for a couple of months yet.

10 March 2014: Starting the journey (PDF 368kB)

Economic overview: Mother Nature is once again reminding us she's a major swing variable for the economy. That said, we're seeing the recent fickleness as not much more than a dampener, as opposed to a game-changer, such is the economic support being provided by high commodity prices. We're still seeing little on the ground that challenges our assessment of vigour across the economy. High confidence readings are expected to show the economy in a sweet spot, with the Truckometer providing a gauge on the extent of forward momentum.

3 March 2014: Terms of endearment (PDF 328kB)

Economic overview: The story of economic vibrancy across the economy is starting to look like the old mouse on the exercise wheel: this looks familiar, this looks familiar. Were expecting this week's data dump to print more of the same, which will keep attention on the very high odds of the OCR moving up in a couple of weeks' time. The risk profile is now tilting towards four hikes before a pause as opposed to three. The outlook for NZ's commodity basket - notably dairy - still looks constructive, despite the surge in prices flagging a broadening supply response. This will keep the terms of trade elevated for a while yet. New Zealand's growth story is far broader than construction, rebuild requirements and housing.

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