new zealand economics market focus · 4/28/2015 · chinese data has highlighted downside risks...

NEW ZEALAND ECONOMICS

MARKET FOCUS

ANZ RESEARCH

28 April 2015

INSIDE

Economic Overview 2

Interest Rate Strategy 5

Currency Strategy 7

Data Event Calendar 9

Local Data Watch 11

Key Forecasts 12

NZ ECONOMICS TEAM

Cameron Bagrie Chief Economist Telephone: +64 4 802 2212 E-mail: [email protected] Twitter @ANZ_cambagrie Philip Borkin Senior Economist Telephone: +64 9 357 4065 Email: [email protected] David Croy Senior Rates Strategist Telephone: +64 4 576 1022 E-mail: [email protected] Peter Gardiner Economist Telephone: +64 4 802 2357 E-mail: [email protected] Mark Smith Senior Economist Telephone: +64 9 357 4096 E-mail: [email protected] Sam Tuck Senior FX Strategist Telephone: +64 9 357 4086 E-mail: [email protected] Con Williams Rural Economist Telephone: +64 4 802 2361 E-mail: [email protected] Sharon Zöllner Senior Economist Telephone: +64 9 357 4094 E-mail: [email protected]

A SOFTER STANCE

ECONOMIC OVERVIEW

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.

INTEREST RATE STRATEGY

Last week’s RBNZ speech and the drift higher in Australian yields contributed to a

steepening in the local curve. With near-end yields expected to be anchored by

an on hold OCR decision, we expect that a dovish slant on the current neutral

RBNZ bias should help cap local yields, and in fact view the front part of the curve

as now under-pricing prospects for a lower OCR. This week’s FOMC decision is the

key for global markets, with the Fed expected to emphasise the data dependence

to movements in the Fed funds rate. Longer-term yields continue to stand out in

relation to global peers, with scope to move lower.

CURRENCY STRATEGY

We expect NZD to remain under pressure into the RBNZ this week; a move we

consider retracement from near “perfection” economic pricing. However, potential

for markets to lighten up USD positioning into US Q1 GDP and the FOMC will

ensure the ride lower remains bumpy for NZD/USD. We remain biased towards

selling NZD/USD strength, seeing any weakness in USD as corrective only.

Chinese data has highlighted downside risks for NZD and the official PMIs (Friday)

need to expand to allay fears. The NZD/AUD has recoiled but continued economic

divergences keep us cautious of extrapolating the recoil into a trend just yet.

THE ANZ HEATMAP

Variable View Comment Risk profile (change to view)

GDP

3.1% y/y

for 2016

Q2

Confidence gauges suggest solid domestic momentum, but dry

weather hit to H1 2015. The global scene is the wildcard.

Unemployment

rate

5.2% for

2016 Q2

Unemployment rate to gradually trend lower. Wage inflation

contained.

OCR 3.5% by

Jun 2016

RBNZ on hold for the foreseeable future, although risks of a cut are

growing. Inflation is the key.

CPI

1.4% y/y

for 2016

Q2

Sub 1% annual inflation over 2015. Benign global backdrop,

domestic pricing pressures contained so far.

Positive Negative

Neutral

Positive Negative

Neutral

Up Down

Neutral

Positive Negative

Neutral

mailto:[email protected]






ANZ Market Focus / 28 April 2015 / 2 of 15

ECONOMIC OVERVIEW

SUMMARY 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.

FORTHCOMING EVENTS Merchandise Trade – March (10:45am, Wednesday, 29 April). We expect a small monthly surplus of $205m, although the annual deficit should continue to widen on commodity price effects.

ANZ Business Outlook – April (1:00pm, Wednesday, 29 April).

RBNZ OCR Review (9:00am, Thursday, 30 April). The OCR is expected to again be left at 3.5%. However, we believe the RBNZ will soften its tone further, delivering a more dovish slant on its current neutral stance.

Building Consents – March (10:45am, Thursday, 30 April). Despite positive anecdotes, consent issuance has weakened recently. We expect a modest bounce in March; further weakness would be a concerning sign. Are higher construction costs and capacity constraints beginning to bite?

RBNZ Credit Aggregates – March (3:00pm, Thursday, 30 April). Economy-wide credit growth should lift to around 5½% y/y, with further modest lifts for agriculture and housing lending.

ANZ Commodity Price Index – April (1:00pm, Monday, 4 May).

WHAT’S THE VIEW? The RBNZ will soften its tone this week. Throw together a combination of low core inflation, the high NZD, an economy converging on trend growth and concerns over the 2015/16 dairy payout, and despite stretched capacity indicators, there is no need for anything heavy handed or even “neutral”. We’re not expecting an outright easing bias, but certainly a more dovish slant to the commentary.

In the Assistant Governor’s speech last week, the Reserve Bank implicitly ruled out a hike any time soon. This leaves the binary options of a cut or no change. This message struck a similar tone to our own OCR Preview that we released at the same time as the speech.

A stand-out from the speech was that the RBNZ still appears to be of the view that transitory forces are dominating inflation outturns. We note the following highlights:

Low inflation at present is seen as largely a consequence of falling oil prices, a slow global recovery and the strong NZD weighing on tradables inflation.

International factors may also be weighing on non-tradable inflation, considering that around one tenth of the movement in non-tradable prices is, somewhat counterintuitively, accounted for by imports (e.g. energy/transport costs).

Domestic inflation is driven by the degree of slack or capacity pressure in the economy (the output gap). A positive output gap – the expectation is that the economy continues to perform strongly – is expected to eventually lift non-tradable and headline inflation. Monetary policy will remain stimulatory to help achieve this.

There was a hat-tip to structural forces, noting that a flatter Phillips curve (the relationship between capacity pressures and inflation) “could mean that the positive output gap is exerting less inflationary pressure than we currently believe, slowing the eventual return to target midpoint”.

We agree with the RBNZ that transitory factors are having a large influence on inflation at present. However, we are not convinced that sufficient weight is being placed on the role that structural forces are also playing. Witness global disinflation pressures, the impact that online shopping is having on retail margins, less wage bargaining power globally, an increasingly mobile work-force (suddenly booming migration can be less inflationary as market forces attract people to labour market hot-spots, thereby cooling them), game-changers such as Uber and what it can do to an industry overnight, and a change in household behaviour (no longer using housing equity as an ATM to boost spending) – to name just a few.

Of course, the RBNZ will be alert to the potential for these structural forces to exert more influence, and will naturally keep a close eye on inflation expectation surveys (every central banker’s bread and butter). That is fine in theory, but these survey measures are


ECONOMIC OVERVIEW

very partial and tend to get dragged around by headline inflation (i.e. are backward-looking), and that leaves an information void.

We’re filling that void by watching our Monthly Inflation Gauge very closely. It has provided an extremely good and timely signal of domestic inflation trends, and like the CPI data, is showing a divide between housing (and some cost-push pockets) and a lack of price pressure elsewhere. If our Gauge continues to signal a benign inflation environment over the coming months, in combination with the elevated NZD and more noticeable downside risks facing the domestic economy (dairy), a reassessment of current OCR settings would be warranted in our view.

While debate and disagreement about the outlook for inflation is one thing, we were left a little perplexed by one phrase in the speech (and it has been pointed out by others too). The Assistant Governor stated that the RBNZ “remain vigilant in watching wage bargaining and price-setting outcomes. Should these settle at levels lower than our target range for inflation, it would be appropriate to ease policy.” At first blush, that all sounds rather logical and consistent with the scenario generating a lower OCR presented in the March MPS. But we wonder why the RBNZ is now again referring to the target band for inflation (1-3%) as opposed to the target mid-point of 2%, which is now explicitly included in the Policy Targets Agreement (and a song and dance was made about it too).

Would the symmetric sentiment from the RBNZ be expressed if core inflation measures were sitting at 2½%? We doubt it! In that scenario, we are sure the RBNZ would instead be talking about the need for them to settle back at 2%.

FIGURE 1. CPI INFLATION

Source: ANZ, Statistics NZ, RBNZ

Turning to other data this week, we expect a modest monthly trade surplus of circa $200m to

have been recorded in March. While this would be the largest unadjusted surplus since June, it is actually reasonably low for this time of year, where the average March surplus for the past six years has been $575m. We believe dairy export volumes are likely to have held up reasonably well during the month, but volumes for other sectors such as meat and forestry are expected to have weakened, in part due to some impact from the Chinese New Year, and also a moderation in dry conditions, in the case of meat exports (less early slaughter). On the price side, while dairy prices from the ANZ Commodity Price Index did show an increase in the month, GlobalDairyTrade contract results between February and March didn’t change much. Forestry prices, on the other hand, fell, particularly over the second half of the month. The high NZD is likely to have meant imports have held at reasonable levels, with crude oil prices also showing a bit more evidence of stabilisation.

The softer trade balance outcome in March will also deliver a further widening in the annual deficit, which we expect to grow towards $3bn – the largest since mid-2009. Looking forward, we expect this theme to continue, with the main culprits being renewed weakness in the dairy and forestry sector, as well as a slowdown in meat production. This is only partially offset by an expectation of a better horticultural sector export performance. The deterioration in the trade accounts bears watching, for it’s a sign the NZD cannot remain elevated indefinitely without collateral damage. We’re expecting the current account to head towards 5% of GDP by the end of the year; that will start to get some attention as the year progresses.

FIGURE 2. OVERSEAS MERCHANDISE TRADE

Source: ANZ, Statistics NZ

The March ANZ Business Outlook survey showed sentiment remaining at elevated levels with a relatively broad-based sense of positivity continuing to percolate through the economy. However, it was notable that the agricultural sector was the big mover

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ECONOMIC OVERVIEW

in the month, with both general business confidence and own activity expectations rising solidly. No doubt some respite in the weather and the bounce in dairy prices over late February were behind this. Therefore, the April survey will be perused with interest to see if the recent reversal in global dairy prices has had any impact. It will also be particularly notable whether or not there are signs of growing angst directed towards the elevated NZD.

FIGURE 3. ANZ BUSINESS OUTLOOK OWN ACTIVITY

Source: ANZ

Building consent issuance has been surprisingly soft since the start of the year. Notwithstanding an ongoing positive tone to construction sector anecdotes, consent issuance for residential buildings has fallen for three consecutive months and has effectively unwound all of its post-election bounce. Our gut feel is that we will see some modest recovery in the March figures, of perhaps say 5% m/m. However, further weakness would be a worrying sign, especially for the RBNZ, which is looking for an ongoing recovery in housing supply, particularly in Auckland, to help restore a better balance to the market and cool price tensions.

We suspect elevated construction costs and capacity constraints are beginning to bite. Perhaps there is simply not enough capacity across the industry to build more. Housing is the one part of our Monthly Inflation Gauge – confirmed later by the CPI – that has been lifting; good old-fashioned demand-pull inflation is alive and well in pockets!

In contrast to recent residential weakness, the value of non-residential consents continues to lift. In fact, our seasonally adjusted estimates show the value has risen for three consecutive months and – outside of a spike in June 2014 – is sitting at its highest level since April 2009. By nature, non-residential consents are lumpy and volatile, so it is possible we see a pull-back in March. However, we expect the underlying trend will remain strong.

FIGURE 4. NEW CONSENT ISSUANCE BY FLOOR AREA

Source: ANZ, Statistics NZ

Economy-wide credit growth is expected to lift towards 5½% y/y. This would be the strongest rate since early 2009 and is above the economy’s current rate of nominal GDP growth. However, it is still relatively low by historical standards. From a sector perspective, housing and agricultural credit growth is likely to have lifted further. The former is related to firming housing market activity, while the latter is expected to be boosted by the impact of farmers drawing down on credit lines as dairy cash flow is squeezed by the lower 2014/15 payout.

Finally, the ANZ Commodity Price Index for April will provide a timely read on non-dairy price trends early next week. Given recent GlobalDairyTrade auctions, the March recovery in the dairy component of this index will no doubt reverse course. Dairy sector price weakness is obviously concerning in itself. However, it will also be interesting to see what is happening on the non-dairy commodity price front. If broader commodity price trends deteriorate further (non-dairy prices bounced 1.1% in March, but fell in the preceding three months and are 4.6% off their peak), then this would add to additional downside risks facing the economy, particularly at a time of ongoing NZD strength.

LOCAL DATA International Travel & Migration – March. A net inflow of 5,000 migrants was experienced. Visitor arrivals fell 3.6% sa as the boost from the Cricket World Cup and Chinese New Year faded.

ANZ Roy Morgan Consumer Confidence – April. The Index rose 4.2 points to 128.8. The Current Conditions Index lifted from 123.7 to 130.3, while the Future Conditions Index rose from 125.3 to 127.8.

RBNZ Credit Card Billings – March. Total billings rose 0.6% m/m (5.2% y/y).

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SUMMARY Last week’s RBNZ speech and the drift higher in Australian yields contributed to a steepening in the local curve. With near-end yields expected to be anchored by an on hold OCR decision, we expect that a dovish slant on the current neutral RBNZ bias should help cap local yields, and in fact view the front part of the curve as now under-pricing prospects for a lower OCR. This week’s FOMC decision is the key for global markets, with the Fed expected to emphasise the data dependence to movements in the Fed funds rate. Longer-term yields continue to stand out in relation to global peers, with scope to move lower.

THEMES New Zealand short-term yields rallied following

the speech by RBNZ Assistant Governor McDermott, which ruled out OCR hikes and outlined why they might lower the OCR. The New Zealand curve steepened as local longer-term yields followed those in Australia higher.

The RBNZ is widely expected to leave the OCR unchanged at 3.5%, with the policy assessment to signal a dovish slant.

This week’s Fed decision is expected to maintain the status quo, with the date of policy lift-off and path of policy normalisation both data dependent and gradual. The mixed run of data has seen markets price in an end of 2015 start to hikes with the statement not expected to cause too many issues for the Treasury market.

New Zealand longer-term yields continue to stand out in relation to global peers, with scope to move lower and flatten the curve.

PREFERRED STRATEGIES – INVESTORS

KEY VIEWS – FOR INVESTORS GAUGE DIRECTION COMMENT

Duration Strategically bullish

FOMC gradualism, low Europe bond yields make NZ stand out.

2s10s Curve Neutral/ flatter

More scope for longer yields to ease.

Geographic 10yr spread Narrower

Have consolidated against US and narrowed versus AU, but have scope to come in further.

Swap spreads

Neutral/ wider

Bond demand solid following index extension.

SETTING THE SCENE We expect the RBNZ to leave the OCR unchanged at 3.5% on Thursday. As we discussed in our OCR Preview last week, the RBNZ is expected to signal a dovish slant on its current neutral bias. But we doubt the Bank is considering easing, and against a backdrop of a market gunning for a cut by the end of the year, markets could be prone to some

mild near-term disappointment. Still, we doubt the disappointment will last long (expectations are pretty tepid) and the move to a different stance will be eyed as the first step in moving the super-tanker. Having ruled out hikes and having a more open door with regard to cuts will keep the market biased one way.

FIGURE 1. NEW ZEALAND SWAP CURVE

Source: ANZ, Bloomberg

GLOBAL INFLUENCES TO SET DIRECTION FOR LONG-TERM YIELDS In contrast to shorter-end yields, the long end of the curve is more influenced by offshore. New Zealand longer-term yields nudged higher, following the drift higher in Australian yields. The latter appeared to reflect a reassessment of RBA actions given a moderate CPI outturn. Ongoing downside risks to growth still suggest the potential for a May RBA rate cut to support the transition underway in economic activity, although the decision is likely to be finely balanced.

A retracement higher in Australian yields also contributed to a decent narrowing in the NZ/AU 10 year spread, which is back at levels not seen since the beginning of the year. We think current levels are more realistic given how divergent local expectations (not enough easing priced in) had become from market expectations for the RBA policy (too much easing priced in). Non-resident demand for NZGS bonds continues to grow, reaching yet another record in March. We expect this trend to continue while New Zealand’s yields remain so attractive by global comparison; and as expectations for cuts grow, bit it’ll be a gradual grind lower.Looking further afield, policy support remains a key factor keeping global yields low. German yields have retracted recent falls, but remain at historically low levels, with the €60bn of monthly ECB QE and a mixed run of data despite supportive financial conditions. Increasing optimism that a deal will be reached so as to avoid a Greek debt default has

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contributed to a narrowing in peripheral Eurozone spreads to bunds. German 10 year yields are currently 0.16%, while French yields (0.42%) are only a fraction above those in Japan (0.29%). Yields for peripheral Eurozone sovereigns remain considerably below New Zealand Government bond yields (3.37%).FIGURE 2. 10 YEAR SOVEREIGN BOND SPREADS


The Fed is expected to maintain its data-dependent stance, both for the timing of the first rate hike and the path of policy normalisation beyond that. Markets appear braced for a soft Q1 US GDP report this week, but the key issue has been how the Fed will view the continued run of mixed data emerging post the weather disruptions. March core durable goods orders undershot expectations, with negative historical revisions, while services sentiment eased, albeit to still high levels. Various regional US manufacturing surveys also failed to bounce higher in April, with the manufacturing PMI also undershooting expectations. Abstracting from recent volatility, US jobless claims still imply ongoing strength in employment growth and further declines in the unemployment rate. The mixed run of data has seen markets price in an end of 2015 start to Fed hikes with the Fed statement not expected to cause too many issues for the Treasury market. US Treasury yields remains below pre-March FOMC meeting levels, with few signs that the market believe the Fed are falling behind the curve.

HIGH NZD YIELDS REMAIN ATTRACTIVE Sound economic and fiscal credentials coupled with positive real yields will ensure strong demand for New Zealand Government bonds, particularly with the New Zealand Treasury reiterating the Government’s resolve to improve management of the Crown balance sheet. The bond index duration extension, and large gap with global yields, should ensure solid demand for NZGS on an outright and cross

market basis, with demand for high yielding NZD assets a key NZD support.

PREFERRED STRATEGIES – BORROWERS Our preference is to watch and wait (especially for borrowers with historic cover in place), with the RBNZ expected to move to a conditional easing bias, with global risks still skewed to the downside, the path of Fed tightening likely to be gradual and with historically low European bond yields potentially weighing on local yields. With scope for yields to move lower, there is limited appeal in adding to hedges.

KEY VIEWS – FOR BORROWERS GAUGE VIEW COMMENT

Hedge ratio Majority hedged

Historic hedges more than adequate. No immediate reason to add to them now.

Value Cheap Rates are still low.

Uncertainty Elevated Global inflation still key. RBNZ won’t hike for a while, so the rationale to hedge is reduced.

MARKET EXPECTATIONS A 25bp OCR cut is around 80% priced in by the end of the year which we view as slightly under-cooked; if there is a cut there will be two and not one.

FIGURE 3. ANZ OCR FORECAST AGAINST MARKET-IMPLIED FORWARD 3MTH BILL RATES AND RBNZ 90 DAY BILL PROJECTIONS


We continue to assess prospects for the OCR using our four pronged criteria; a high NZD, failure of dairy prices to rebound sufficiently to alleviate cash-flow concerns, non-OCR measures to slow housing and continued evidence of low inflation. We can safely tick the first two, the third looks to be pending mid-year, and more subdued readings from our monthly inflation gauge will bring the fourth into play. So the risks of the OCR moving lower are real and non-trivial, despite the economic backdrop still having a chirpy feel about it.

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CURRENCY STRATEGY

SUMMARY We expect NZD to remain under pressure into the RBNZ this week; a move we consider retracement from near “perfection” economic pricing. However, potential for markets to lighten up USD positioning into US Q1 GDP and the FOMC will ensure the ride lower remains bumpy for NZD/USD. We remain biased towards selling NZD/USD strength, seeing any weakness in USD as corrective only. Chinese data has highlighted downside risks for NZD and the official PMIs (Friday) need to expand to allay fears. The NZD/AUD has recoiled but continued economic divergences keep us cautious of extrapolating the recoil into a trend just yet.

TABLE 1: KEY VIEWS CROSS WEEK MONTH YEAR

NZD/USD ↔/↓ USD to find demand USD to strengthen

NZD/AUD ↔ RBA next week NZ not immune to global challenges

NZD/EUR ↔/↓ Greek solution? EUR remains weak

NZD/GBP ↔/↑ GBP bounces post-election GBP resurgence

NZD/JPY ↔/↑ BoJ potential Yen weakness

THEMES AND RISKS The USD may weaken into the FOMC to trade

more in line with the US rates market; rates are pricing lift-off as a turn-of-the-year event, but we continue to expect an earlier start.

We expect a softening in tone from the RBNZ this week, imparting a softening tone to the NZD as well. Markets have also reduced pricing for a RBA cut in May, leaving it a 50-50 call.

Iron ore prices have rebounded, along with oil prices. But Chinese data has been weak so it is hard to get overly optimistic about commodities.

Greece provides a tail risk in both directions: a solution would drive EUR strength, or concern could escalate, weakening EUR.

TABLE 2: KEY UPCOMING EVENT RISK

EVENT WHEN (NZDT)

LIKELY IMPACT

GBP Q1 GDP Tue 20:30 NZD/GBP ↓ USD Richmond Fed Wed 02:00 NZD/USD ↓ NZD Trade balance Wed 10:45 NZD ↓ NZD ANZ Business conf. Wed 13:00 NZD ↑ USD Q1 GDP Thu 00:30 NZD/USD ↑ USD FOMC Thu 06:00 NZD/USD ↓ NZD RBNZ Thu 09:00 NZD ↔/↓ NZD Building permits Thu 10:45 NZD ↔ JPY BoJ Thu PM NZD/JPY ↑ EUR CPI Thu 21:00 NZD/EUR ↔ USD Chicago PM Fri 01:45 NZD/USD ↓ CNY Official PMI Fri 13:00 NZD/CNY ↓ GBP Markit PMI Fri 20:30 NZD/GBP ↓ USD ISM Sat 02:00 NZD/USD ↓

EXPORTERS’ STRATEGY Weakening Fed prospects allow exporters to hedge on dips, but we prefer duration is kept short. NZD/AUD exporters should use deeper dips to hedge.

IMPORTERS’ STRATEGY Levels around parity NZD/AUD are good long-term levels; NZD/USD importers can increase hedging from 0.77 up.

DATA PULSE New Zealand fundamentals remain solid. ANZ consumer confidence remained elevated, while migration hit a new annual record. Consumer spending showed signs of improvement, with credit card spending higher. However, the NZD was driven lower (along with rates markets) by a softening tone from the RBNZ in a speech on inflation by RBNZ Assistant Governor McDermott. The OCR is not moving up: down or no-change are the options. In contrast, market expectations for further RBA easing were pared after RBA Governor Stevens cast some doubt as to the efficacy of further cuts, and the RBA minutes confirmed the very cautious easing bias. Australian Q1 CPI also proved more resilient than the market anticipated, and NZD/AUD weakened. The BoE minutes acknowledged the firm data trend with some seeing the decision to hike rates as finely balanced. Retail sales did provide some reasons for caution, missing expectations, but GBP remained solid ahead of next week’s election. Global growth fears were increased after advance April PMI reads from China, Europe and the US all declined. China dipped further into contraction, and while Europe and the US remained expansionary, the signs were not encouraging for global sentiment.

TABLE 3: NZD VS AUD: MONTHLY GAUGES GAUGE GUIDE COMMENT

Fair value ↔/↓ Still above fair value. Yield ↔/↑ Yield differentials remain a focus. Commodities ↔/↓ Iron ore looks to be stabilising. Data ↑ NZ economically outperforming. Techs ↑ Support at 0.97 and 0.96. Sentiment ↔/↑ NZD more resilient to China. Other ↓ RBNZ and RBA converging? On balance ↔ Taking a breather.

TABLE 4: NZD VS USD: MONTHLY GAUGES GAUGE GUIDE COMMENT

Fair value ↔ Closer to fair value. Yield ↑ Yield advantage still there. Commodities ↓ Commodities waning. Risk aversion ↓ Chinese and global growth fears. Data ↑ USD data is softening. Techs ↔/↓ Wide 0.72-0.77 range. Other ↔/↓ USD expected to pick up again. On balance ↓ NZD fully priced.


CURRENCY STRATEGY

TECHNICALS FIGURE 1. NZD/USD DAILY CANDLES WITH RSI & MA

NZD/USD continues to demonstrate a rising trend, but is about to run into strong resistance. While technically there is room for a further increase toward the 0.78 level, resistance is well defined on the topside (including the 200dma at 0.7827). This indicates that long-term short positions should be considered from 0.77 up.

FIGURE 2. NZD/AUD MONTHLY CANDLES WITH RSI & MA

NZD/AUD has pulled back to a strong support channel from 0.96 to 0.97. This is a relatively pivotal area for the cross and a break through it would form a small double top ahead of parity. This opens the downside, were support to break.

TABLE 5: KEY TECHNICAL ZONES CROSS SUPPORT RESISTANCE

NZD/USD 0.7380 – 0.7400 0.7180 – 0.7200

0.7700 – 0.7750 0.7850 – 0.7900

NZD/AUD 0.9650 - 0.9680 0.9580 - 0.9600

0.9750 – 0.9800 1.0000

NZD/EUR 0.6830 – 0.6860 0.73

NZD/GBP 0.4780 - 0.4800 0.5150 – 0.5200 0.5300 – 0.5350

NZD/JPY 87.75 – 88.25 91.50 – 92.00

POSITIONING USD longs continue to be trimmed ahead of the FOMC this week. JPY shorts were reduced the most, but shorts in AUD and GBP were also reduced. Net long NZD positions increased for the fourth week, but remain small relative to history.

GLOBAL VIEWS This week’s FOMC’s economic assessment is expected to be less upbeat than in March. A greater sense of caution from recent Fed speakers suggests there is also a possibility the balance of risks around the outlook for activity may not be as finely balanced as it was in March.

The disappointing run of US activity data and a more sombre tone from Fed officials suggests the prospects of a June start to normalisation are dimming. Activity data needs to lift and do so promptly for June to be a realistic possibility. An improvement in activity would also need to be convincing enough for the FOMC to have the confidence that it will be sustained. Time might be running out on this score. A shift away from our June lift-off call – all else being equal in domestic data – would delay our forecast decline for NZD/USD to 0.72 from the current June quarter to the September quarter.

FORWARDS: CARRY AND BASIS FIGURE 3. NZD/USD SHORT BASIS CURVE

Short basis normalised over the course of last week. Three month basis remains wide due to three month BKBM setting at the lower end of recent ranges. FRA/OIS at 12bpts looks too tight relative to historical levels, and we expect FRA/OIS to normalise closer to 14/15pts, pulling 3 month basis lower.

FIGURE 4. RELATIVE ATTRACTION OF THE FWD CURVE

Source: ANZ, Bloomberg, Reuters

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DATA EVENT CALENDAR

DATE COUNTRY DATA/EVENT MKT. LAST NZ TIME

28-Apr AU ANZ-RM Consumer Confidence Index - 26-Apr -- 111.8(a) 11:30 JN Retail Trade YoY - Mar -- -9.7%(a) 11:50 JN Retail Sales MoM - Mar -- -1.9%(a) 11:50 AU Conf. Board Leading Index MoM - Feb -- 0.5%(a) 12:00 UK BBA Loans for House Purchase - Mar 37800 37305 20:30 UK GDP QoQ - Q1 A 0.5% 0.6% 20:30 UK GDP YoY - Q1 A 2.6% 3.0% 20:30 UK Index of Services MoM - Feb 0.5% -0.2% 20:30 UK Index of Services 3M/3M - Feb 0.7% 0.8% 20:30 CH Leading Index - Mar -- 98.85 28-30 Apr

29-Apr US S&P/CS 20 City MoM SA - Feb 0.70% 0.87% 01:00 US S&P/CS Composite-20 YoY - Feb 4.70% 4.56% 01:00 US Consumer Confidence Index - Apr 102.2 101.3 02:00 US Richmond Fed Manufact. Index - Apr -2 -8 02:00 NZ Trade Balance - Mar 300M 50M 10:45 NZ Exports - Mar 4.40B 3.92B 10:45 NZ Imports - Mar 4.05B 3.87B 10:45 NZ Trade Balance 12 Mth YTD - Mar -2700M -2181M 10:45 NZ ANZ Activity Outlook - Apr -- 42.2 13:00 NZ ANZ Business Confidence - Apr -- 35.8 13:00 CH Westpac-MNI Consumer Sentiment - Apr -- 114.7 13:45 UK Nationwide House PX MoM - Apr 0.2% 0.1% 18:00 UK Nationwide House Px NSA YoY - Apr 4.1% 5.1% 18:00 EC M3 Money Supply YoY - Mar 4.3% 4.0% 20:00 EC M3 3-month average - Mar 4.1% 3.8% 20:00 EC Business Climate Indicator - Apr 0.20 0.23 21:00 EC Industrial Confidence - Apr -2.9 -2.9 21:00 EC Consumer Confidence - Apr F -4.6 -4.6 21:00 EC Economic Confidence - Apr 103.9 103.9 21:00 EC Services Confidence - Apr 6 6 21:00 UK CBI Reported Sales - Apr 25 18 22:00 US MBA Mortgage Applications - 24-Apr -- 2.3% 23:00

30-Apr GE CPI MoM - Apr P -0.1% 0.5% 00:00 GE CPI YoY - Apr P 0.4% 0.3% 00:00 GE CPI EU Harmonized MoM - Apr P -0.1% 0.5% 00:00 GE CPI EU Harmonized YoY - Apr P 0.2% 0.1% 00:00 US GDP Annualized QoQ - Q1 A 1.0% 2.2% 00:30 US Personal Consumption - Q1 A 1.7% 4.4% 00:30 US GDP Price Index - Q1 A 0.5% 0.1% 00:30 US Core PCE QoQ - Q1 A 1.0% 1.1% 00:30 US Pending Home Sales MoM - Mar 1.0% 3.1% 02:00 US Pending Home Sales NSA YoY - Mar 5.1% 12.0% 02:00 US FOMC Rate Decision - Apr 0.25% 0.25% 06:00 NZ RBNZ Official Cash Rate - Apr 3.50% 3.50% 09:00 NZ Building Permits MoM - Mar -- -6.3% 10:45 UK GfK Consumer Confidence - Apr 4 4 11:05 AU Import price index QoQ - Q1 1.0% 0.9% 13:30 AU Export price index QoQ - Q1 0.0% 0.0% 13:30

Continued on following page


DATA EVENT CALENDAR

Key: AU: Australia, EC: Eurozone, GE: Germany, JN: Japan, NZ: New Zealand, UK: United Kingdom, US: United States, CH: China. Source: Dow Jones, Reuters, Bloomberg, ANZ Bank New Zealand Limited. All $ values in local currency. Note: All surveys are preliminary and subject to change

DATE COUNTRY DATA/EVENT MKT. LAST NZ TIME

30-Apr AU Private Sector Credit MoM - Mar 0.5% 0.5% 13:30 AU Private Sector Credit YoY - Mar 6.3% 6.2% 13:30 NZ Money Supply M3 YoY - Mar -- 6.6% 15:00 GE Retail Sales MoM - Mar 0.5% -0.1% 18:00 GE Retail Sales YoY - Mar 3.1% 3.6% 18:00 GE Unemployment Change (000's) - Apr -15K -14K 19:55 GE Unemployment Rate - Apr 6.4% 6.4% 19:55 EC Unemployment Rate - Mar 11.2% 11.3% 21:00 EC CPI Estimate YoY - Apr 0.0% -0.1% 21:00 EC CPI Core YoY - Apr A 0.6% 0.6% 21:00

1-May US Employment Cost Index - Q1 0.6% 0.6% 00:30 US Personal Income - Mar 0.2% 0.4% 00:30 US Personal Spending - Mar 0.5% 0.1% 00:30 US PCE Deflator MoM - Mar 0.2% 0.2% 00:30 US PCE Deflator YoY - Mar 0.4% 0.3% 00:30 US PCE Core MoM - Mar 0.2% 0.1% 00:30 US PCE Core YoY - Mar 1.4% 1.4% 00:30 US Initial Jobless Claims - 25-Apr 289K 295K 00:30 US Continuing Claims - 18-Apr 2300K 2325K 00:30 US ISM Milwaukee - Apr -- 53.25 01:00 US Chicago Purchasing Manager - Apr 50.0 46.3 01:45 AU AiG Perf of Mfg Index - Apr -- 46.3 11:30 JN Natl CPI YoY - Mar 2.2% 2.2% 11:30 JN Natl CPI Ex Fresh Food YoY - Mar 2.0% 2.0% 11:30 JN Natl CPI Ex Food, Energy YoY - Mar 2.0% 2.0% 11:30 JN Tokyo CPI YoY - Apr 0.7% 2.3% 11:30 JN Tokyo CPI Ex-Fresh Food YoY - Apr 0.5% 2.2% 11:30 JN Tokyo CPI Ex Food, Energy YoY - Apr 0.2% 1.7% 11:30 CH Manufacturing PMI - Apr 50.0 50.1 13:00 CH Non-manufacturing PMI - Apr -- 53.7 13:00 AU PPI YoY - Q1 -- 1.1% 13:30 AU PPI QoQ - Q1 -- 0.1% 13:30 AU Commodity Index AUD - Apr -- 83.7 18:30 AU Commodity Index YoY - Apr -- -19.7% 18:30 UK Net Consumer Credit - Mar £0.8B 0.7B 20:30 UK Net Lending Sec. on Dwellings - Mar £1.8B £1.7B 20:30 UK Mortgage Approvals - Mar 62.4K 61.8K 20:30 UK Money Supply M4 MoM - Mar -- -0.2% 20:30 UK M4 Money Supply YoY - Mar -- -3.2% 20:30 UK M4 Ex IOFCs 3M Annualised - Mar 2.2% 5.0% 20:30 UK Markit PMI Manufacturing SA - Apr 54.6 54.4 20:30

2-May US Markit Manufacturing PMI - Apr F 54.2 54.2 01:45 US Construction Spending MoM - Mar 0.5% -0.1% 02:00 US ISM Manufacturing - Apr 52.0 51.5 02:00 US ISM Prices Paid - Apr 42 39 02:00 US U. of Mich. Sentiment - Apr F 96.0 95.9 02:00


LOCAL DATA WATCH

Our expectation is for no change in OCR settings for the foreseeable future. The risk profile is tilted to the downside, flagging the possibility of OCR cuts in time.

DATE DATA/EVENT ECONOMIC SIGNAL COMMENT

Wed 29 Apr (10:45am)

Merchandise Trade – Mar

Widening annual deficit

While a small monthly trade surplus is expected, the annual deficit should continue to widen on commodity price effects.

Wed 29 Apr (1:00pm)

ANZ Business Outlook – Apr -- --

Thu 30 Apr (9:00am) RBNZ OCR Review A softer tone

We believe conditions are ripe for a softer slant on the RBNZ’s current neutral stance. NZD strength alone should lead to a reassessment of the outlook for monetary policy.

Thu 30 Apr (10:45am)

Building Consents – Mar Topping out?

Despite positive anecdotes, consent issuance has weakened recently. We expect a bounce in March. But are higher construction costs and capacity constraints beginning to bite?

Thu 30 Apr (3:00pm)

RBNZ Credit Aggregates – Mar Holding Economy-wide credit growth should lift to around 5½% y/y,

with further increases for agriculture and housing growth. Mon 4 May (1:00pm)

ANZ Commodity Price Index – Apr -- --

Tue 5 May (12:00pm) QV House Prices – Apr Auckland

outperforming Annual growth should move above last month’s 7.7%, with Auckland leading the way.

Wed 6 May (10:45am)

Labour Market Statistics – Q1

Still solid, but wage growth benign

While still solid, employment growth should be display a more modest rate of increase than in Q4. The unemployment rate is forecast to ease to 5.6%. Private sector LCI wage growth is forecast at a relatively benign 1.9% y/y.

11-15 May REINZ Housing Market Report – Apr

Problematic for the RBNZ

Sales volumes and prices may partially unwind some of March’s large gains. However, the trend in prices (particularly in Auckland) is clear – it’s up!

Mon 11 May (10:45am)

Electronic Card Transactions – Apr Pull-back?

Core retail spending grew at its fastest quarterly pace since mid-2007 in March. Is it time for a pull-back as some support factors fade?

Tue 12 May (10:00am)

ANZ Truckometer – April -- --

Wed 13 May (9:00am)

RBNZ Financial Stability Report Investor watch

System sound but RBNZ watching dairy and housing. Further details on changes to capital requirements on investor lending expected.

Wed 13 May (10:45am) Food Price Index – Apr Unwind In part due to seasonal weakness, but also an unwind of

strength over Q1, we expect a modest fall. Thu 14 May (10:30am) Business NZ PMI – Apr Mid-50s still Modest expansion in the sector continues, although the tension

between NZD strength and construction sector support remains.

Thu 14 May (10:45am)

Retail Trade Survey – Q1 Strong

ECT data suggests a decent underlying pace of retail spending to start the year (particularly at the core level). With prices subdued, we expect a strong increase in sales volumes.

Mon 18 May (10:30am) Business NZ PSI – Apr Mid to high 50s The services sector continues to perform solidly and is at the

heart of the decent pace of domestic economic expansion. Tue 19 May (1:00pm) ANZ Job Ads – Apr -- --

Tue 19 May (10:45am) PPI – Q1 Limited price

pressures Both input and output indices are expected to fall, with lower oil prices partly offset by higher wholesale electricity prices.

Tue 19 May (3:00pm)

RBNZ Survey of Expectations – Q2 Falling Two-year ahead inflation expectations fell to just 1.8% in Q1.

Given low headline inflation, they should fall further. Wed 20 May (1:00pm)

ANZ Regional Trends – Q1 -- --

Thu 21 May NZ Budget In right direction Forecasts likely to show a near miss to 2014/15 OBEGAL surplus, but surpluses/falling public debt over latter part of Budget forecast period.

Thu 21 May (3:00pm)

RBNZ Credit Card Billings – Apr Reasonable trend Consumers remain upbeat, although they are continuing to

show a reasonable level of restraint.

On balance Data watch Tracking along fine, but the risks are tilted to the downside.


KEY FORECASTS AND RATES

Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

GDP (% qoq) 0.8 0.6 0.7 0.9 0.8 0.7 0.6 0.6 0.6 0.6

GDP (% yoy) 3.5 3.1 3.1 3.0 3.0 3.2 3.1 2.8 2.6 2.6

CPI (% qoq) -0.2 -0.3 0.3 0.5 0.0 0.4 0.5 0.6 0.2 0.2

CPI (% yoy) 0.8 0.1 0.2 0.3 0.5 1.3 1.4 1.6 1.8 1.8

Employment (% qoq) 1.2 0.6 0.5 0.4 0.4 0.3 0.3 0.3 0.3 0.3

Employment (% yoy) 3.5 3.2 3.4 2.9 2.1 1.7 1.5 1.4 1.3 1.3

Unemployment Rate (% sa) 5.7 5.6 5.5 5.4 5.3 5.2 5.2 5.2 5.1 5.1

Current Account (% GDP) -3.3 -4.1 -4.4 -4.6 -4.8 -4.8 -4.9 -4.9 -5.0 -5.0

Terms of Trade (% qoq) -1.9 -0.5 0.5 0.6 0.3 -0.1 -0.3 -0.4 -0.5 -0.5

Terms of Trade (% yoy) -4.6 -6.7 -6.3 -1.3 1.0 1.4 0.5 -0.4 -1.2 -1.2

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15

Retail ECT (% mom) -0.2 0.8 0.1 1.0 -0.3 -0.1 -0.3 1.0 0.8 --

Retail ECT (% yoy) 5.1 4.1 5.4 5.7 3.3 3.5 4.0 3.8 3.7 -- Credit Card Billings (% mom) -0.8 1.0 0.2 1.3 0.5 -0.6 2.0 -0.1 0.6 --

Credit Card Billings (% yoy) 4.5 4.3 4.5 6.8 5.2 4.6 6.2 5.8 5.2 --

Car Registrations (% mom) 1.9 -1.3 3.2 -1.8 0.2 2.1 -0.7 -0.3 2.5 --

Car Registrations (% yoy) 16.6 18.7 31.1 21.3 16.5 21.0 17.1 12.1 11.8 --

Building Consents (% mom) -2.0 1.3 -13.7 11.2 10.1 -2.5 -4.6 -6.3 -- --

Building Consents (% yoy) 22.8 21.8 1.2 13.1 13.9 3.8 7.1 0.3 -- --

REINZ House Price Index (% yoy) 5.9 4.8 4.1 3.9 6.0 6.0 7.5 6.1 9.5 --

Household Lending Growth (% mom) 0.3 0.4 0.3 0.4 0.4 0.5 0.5 0.5 0.0 --

Household Lending Growth (% yoy) 5.2 5.0 4.8 4.8 4.6 4.7 4.8 4.9 0.0 --

ANZ Roy Morgan Consumer Conf. 132.7 125.5 127.7 123.4 121.8 126.5 128.9 124.0 124.6 128.8

ANZ Business Confidence 39.7 24.4 13.4 26.5 31.5 30.4 .. 34.4 35.8 --

ANZ Own Activity Outlook 45.1 36.6 37.0 37.8 41.7 37.3 .. 40.9 42.2 --

Trade Balance ($m) -943 -465 -1359 -892 -283 -199 33 50 -- --

Trade Bal ($m ann) 1034 1805 667 -56 -492 -1182 -1434 -2181 -- -- ANZ World Commodity Price Index (% mom)

-2.5 -3.5 -1.3 -0.9 -1.4 -4.4 -0.3 4.2 4.6 --

ANZ World Comm. Price Index (% yoy) -3.2 -7.3 -9.5 -11.5 -12.5 -17.2 -18.4 -15.8 -11.9 --

Net Migration (sa) 4540 4730 4720 5230 5020 4080 5470 4830 4990 --

Net Migration (ann) 41043 43483 45414 47684 49836 50922 53797 55121 56275 -- ANZ Heavy Traffic Index (% mom) 2.0 -1.6 2.7 0.9 -2.9 3.3 0.0 -0.4 -0.4 --

ANZ Light Traffic Index (% mom) 0.3 0.8 0.9 0.3 -1.6 -1.1 0.5 0.4 0.0 --

Figures in bold are forecasts. mom: Month-on-Month qoq: Quarter-on-Quarter yoy: Year-on-Year


KEY FORECASTS AND RATES

ACTUAL FORECAST (END MONTH)

FX RATES Feb-15 Mar-15 Today Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

NZD/USD 0.756 0.748 0.764 0.72 0.70 0.70 0.69 0.69 0.68 0.68

NZD/AUD 0.969 0.982 0.973 0.97 0.96 0.97 0.97 0.97 0.97 0.97

NZD/EUR 0.676 0.696 0.702 0.71 0.71 0.74 0.69 0.66 0.62 0.62

NZD/JPY 90.49 89.68 90.97 88.6 86.8 87.5 86.9 87.6 87.4 88.4

NZD/GBP 0.490 0.505 0.502 0.49 0.47 0.45 0.45 0.45 0.44 0.44

NZ$ TWI 79.3 80.0 79.2 79.1 77.8 78.7 76.7 75.8 74.0 74.2

INTEREST RATES Feb-15 Mar-15 Today Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

NZ OCR 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.75

NZ 90 day bill 3.63 3.63 3.63 3.70 3.80 3.80 3.80 3.80 3.80 4.20

NZ 10-yr bond 3.29 3.23 4.71 3.00 2.80 2.80 2.90 3.10 3.20 3.30

US Fed funds 0.25 0.25 0.25 0.50 0.50 0.75 1.00 1.25 1.50 1.75

US 3-mth 0.26 0.28 0.28 0.70 0.70 0.95 1.20 1.45 1.70 1.80

AU Cash Rate 2.25 2.25 2.25 2.00 2.00 2.00 2.00 2.00 2.00 2.00

AU 3-mth 2.33 2.23 2.25 2.20 2.30 2.30 2.30 2.30 2.30 2.30 Forecasts finalised as at 13 March 2015

24 Mar 20 Apr 21 Apr 22 Apr 23 Apr 24 Apr

Official Cash Rate 3.50 3.50 3.50 3.50 3.50 3.50

90 day bank bill 3.63 3.60 3.60 3.60 3.61 3.61

NZGB 12/17 3.08 3.18 3.18 3.17 3.18 3.17

NZGB 03/19 3.10 3.14 3.14 3.13 3.15 3.13

NZGB 04/23 3.23 3.18 3.18 3.19 3.21 3.24

NZGB 04/27 3.33 3.31 3.31 3.32 3.34 3.37

2 year swap 3.57 3.58 3.58 3.58 3.58 3.57

5 year swap 3.59 3.57 3.57 3.58 3.58 3.59

RBNZ TWI 79.2 80.25 80.25 80.02 80.02 79.19

NZD/USD 0.7573 0.77 0.77 0.77 0.77 0.76

NZD/AUD 0.9714 0.99 0.99 0.99 0.99 0.98

NZD/JPY 90.88 91.64 91.64 91.38 91.78 91.01

NZD/GBP 0.5073 0.52 0.52 0.51 0.51 0.50

NZD/EUR 0.7011 0.71 0.71 0.71 0.72 0.71

AUD/USD 0.7796 0.78 0.78 0.77 0.78 0.78

EUR/USD 1.0802 1.08 1.08 1.07 1.07 1.07

USD/JPY 120.00 118.81 118.81 119.43 119.61 119.94

GBP/USD 1.4929 1.50 1.50 1.49 1.49 1.50

Oil (US$/bbl) 46.00 55.71 56.37 56.37 55.58 56.17

Gold (US$/oz) 1182.30 1203.90 1196.50 1196.98 1199.95 1189.65

Electricity (Haywards) 8.23 7.89 9.21 8.70 7.96 8.28

Baltic Dry Freight Index 597 598 601 600 599 600

Milk futures (USD) 102 99 98 99 100 100


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This document has been prepared by ANZ Bank New Zealand Limited, Level 7, 1 Victoria Street, Wellington 6011, New Zealand, Ph 64-4-802 2212, e-mail [email protected], http://www.anz.co.nz

new zealand economics market focus · 4/28/2015 · chinese data has highlighted downside risks...

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