Markets Outlook. Still Reasons to Expect a Stronger January research.bnz.co.nz Page 1. Signs of ongoing patchiness into end-2010

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Markets Outlook 1 January 211 Still Reasons to Expect a Stronger 211 Signs of ongoing patchiness into end-21 % change Gross Domestic Product November s merchandise trade reasonable enough But

1 Markets Outlook 1 January 211 Still Reasons to Expect a Stronger 211 Signs of ongoing patchiness into end-21 % change Gross Domestic Product November s merchandise trade reasonable enough But spending, housing, still seem very subdued We expect tomorrow s QSBO to be a bit better Forecasts Rain alleviates drought impacts, dairy prices still improving More to justify the GDP pick-up we still expect for Annual trend With New Zealand s economic recovery having lost momentum through the course of 21 we have to wonder; will GDP growth actually improve to any material degree in the year ahead? For the record, we still believe it will. Indeed, there remain good reasons to expect some very good looking numbers, as the year progresses. Sure, risks of ongoing disappointment will linger awhile globally and locally - in keeping with the further repair that needs to occur in the financial and balance-sheet realms. And it s not as if there has been much sign of NZ activity sparking up over the previous month or two, following the reported flat-lining of GDP over the six months to September. All quite disappointing. Granted, this morning s merchandise export and import figures for November were each better than we thought, but were no clear cause to strengthen the.3% increment we re picking for Q4 GDP. The 19% annual expansion in the values of exports looked predominantly price driven, while we wonder if part of the 15% lift in imports pinned too much hope on a bumper festive season, post the 1 October tax cuts. The net result of the trade statistics was a deficit of $186m, which was good enough to maintain slight further improvement in the annual surplus, to $1.48b. This result points to a reduced current account deficit for calendar 21, of around 2.4% of GDP, compared to the 3.1% proportion registered for the year to September Quarter Annual Source: BNZ, Statistics NZ Quarterly Very little else seems to have been improving in the closing months of 21, however. Concrete examples have been today s car registrations, which, in December, essentially reversed all of the gains they had eked out since September. We ve also seen, today, December s housing statistics for Auckland-centric realtor Barfoot and Thompson. By and large these were still chopping around. Sales, while up a tad on our seasonally adjusted estimates, remained very low, relatively speaking. And the average sale price essentially rinsed itself of its price-bracket distortions, to be down 4% on a year ago (and hardly different to where it was way back in December 26!). Listings were also signalling a high caution, with fresh supply low-balling the market, amid an existing stock that remained on the high side of normal. The only sign of movement continued to come through in rents (5% y/y), although December quarter letting numbers were barely changed from a year ago. The Barfoot and Thompson data are obviously not a positive prelude to the Quotable Value New Zealand % 4 Merchandise Trade Annual growth in 3 month averages excluding aircraft & ships Level (seas adj) 22 2 First-time Vehicle Registrations Exports Total Imports Source: Statistics NZ, BNZ Source: LTSA, BNZ research.bnz.co.nz Page 1

Average sale price $NZ 6, Barfoots House Prices net % who are positive 8 Business Confidence 55, 6 National Bank 5, 4 45, 4, 35, 2-2 -4 3, -6 QSBO 25, 21 22 23 24 25 26 27 28 29 21 Source: Barfoot

2 Average sale price $NZ 6, Barfoots House Prices net % who are positive 8 Business Confidence 55, 6 National Bank 5, 4 45, 4, 35, , -6 QSBO 25, Source: Barfoot amd Thompson, BNZ Source: BNZ, NBNZ, NZIER report to be published this Thursday, at high noon, nor the Real Estate Institute s nationwide statistics which might well be released before the week is out, nor tomorrow morning s November building consents. Speaking of subdued, we also suspect this of consumer spending for the closing stages of 21, and into the early part of 211. We ll get insight into this when Paymark publishes its latest holiday-season report this afternoon. Similarly, we ll also be holding our breath come Thursday s electronic card transactions, covering the month of December, given the patent risk of an unpleasant surprise. Reports from retailers have not seemed encouraging, and there have been numerous anecdotes of greater than usual discounting. With all of this, we might be tempted to throw the towel in on the recovery. But we re not, at least not for the full year ahead. In engineering our central forecasts for 211, we have the world economy maintaining its recovery (albeit in a variegated fashion), multi-decade highs in New Zealand s terms of trade, an inventory cycle, supportive monetary policy, substantial reconstruction work arising from Canterbury s earthquake and the September/October Rugby World Cup. few weeks, in the right areas, which has greatly averted drought and its wider impacts on the economy. Indeed, some districts have gone from much too little water to much too much, although there are still residual drought issues for big chunks of the Waikato, Northland, the East Coast and Wairarapa and we will continue to monitor this closely. Overall, however, the recent weather has improved the scope for the farming sector to realise the benefits of soaring commodity prices. Fonterra s early-january auction, indeed, achieved a further strengthening in USD-denominated prices, of around 7%. This, in turn, suggests a good chance of witnessing another solid result for Thursday s ANZ commodity export prices, for December, with ongoing in many non-dairy commodity prices to boot. Buoyant terms of trade are, as mentioned, one of a number of things we think should drive stronger NZ GDP over the coming twelve months notwithstanding the obvious lack of evidence that a clear pick-up is coming through for the meantime. In keeping with this, there is a still-optimistic bent to consumer confidence. And business expectations have strengthened over the past few months, to the point of signalling robust GDP growth - at least in terms of the National Bank business survey, in its 6-12 month outlook. What we really need to see is this improvement echoed in the more immediate assessments of the Quarterly Survey of Business Opinion (QSBO), due tomorrow morning. Fingers firmly crossed on this. What has definitely improved has been the weather, in that there has been a good amount of rain over the past craig_ebert@bnz.co.nz research.bnz.co.nz Page 2

3 Domestic Interest Rates Short end rates have been very quiet over the holiday period and last week s activity was no different. The 9-day bank bill yield increased 2bps from 3.18% to 3.2%. There has been little action in the rateset and it is likely that it will stay this way for the coming week. The 9-day bank bill margin is currently 19bps which has increased by 3bps from where it was in December. We currently have nothing priced in for the January RBNZ meeting and 11bps priced in for the next four meetings. The curve is very flat at the moment with the bank bill strip sitting at 3.22% from late April to early July. Last week saw a significant rally across the New Zealand government bond market. We saw a rally of 9bps in the 13s and 11bps in the 21s, closing at 3.9% and 5.76% respectively. Looking ahead for the week, direction will come from offshore events, but we also have some local data, including Tuesday s QSBO Business Confidence survey, and Thursday s ANZ Commodity price index. 9 day 4/13 5/21 2yr swaps 1yr swaps 2yr/1yr bills NZGS NZGS s/a s/a swaps(bps) 31-Dec % 4.% 5.87% 3.8% 5.53% Jan % 3.9% 5.76% 3.78% 5.52% 176 Change (bps) Reuters pgs BNZL BNZM The swaps market has also been very subdued with little movement in rates. The 1-yr and 2-yr have rallied 1bp each to 3.38% and 3.78% respectively. The 2s-1s has widened 3bps from 173bps to 176bps. In terms of data, there was a weak US non-farm payrolls number on Friday with new jobs coming in at 13,, as opposed to the market consensus of 15,. Another quiet week is expected in swaps with activity to come from offshore moves. warwick_foy@bnz.co.nz % Ten-year Swaps 9-day Bank Bills Interest Rates Forecasts 2. Jan- Jan-1 Jan-2 Jan-3 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Source: RBNZ, BNZ Interest Rate Technicals NZD 5yr Swap Rate Outlook: Neutral MT Resistance: 4.76% MT Support: 4.68% With previous trendline support of 4.76% being broken, we now look to the next support area which comes in at 4.68% (current market). A break of this level suggests further downside levels will be tested in the coming weeks. jarrad_bourke@bnz.co.nz NZ 2yr-5yr Swap Spread (yield curve) Outlook: Neutral MT Resistance: +1 MT Support: +57 Market has still not reached the target of 1 and seems content to trade in the 9s for time being. Only a breach of 1 will signal further steepening. NZD 5-yr Swap Daily Source: Bloomberg NZD 2-5yr Swap Spread Daily Source: Bloomberg research.bnz.co.nz Page 3

4 Foreign Exchange Market The NZD finished 21 on a strong note. The combination of surging commodity prices, buoyant equity markets and a generally weaker USD saw the NZD/USD gain 3 cents to around.78 in the last week of the year. Undoubtedly though, part of the NZD s strength over the holiday period reflected year-end position squaring and whippy holiday-thinned markets. As liquidity has gradually returned in the New Year, the NZD has begun to correct back towards fundamentals. Indeed, notwithstanding the weaker-than-expected payrolls data, the NZD/USD spent most of last week heading south. Not only did a slew of upbeat US economic data bolster demand for the USD, but commodity prices gave up part of their late 21 gains, weighing on growth-sensitive currencies like the AUD and NZD. As an indication of how the NZD/USD s near-term drivers are shaping up, our short-term valuation model currently estimates a NZD/USD fair-value range of We saw the NZD/USD gravitate towards this range last week but, at current spot rates, the NZD/USD still looks a little overstretched. As a result, we d expect any NZD/USD rallies above.765 to run out of steam. Still, the big picture is one where we expect the NZD/USD to hold up for longer through 211 (see our NZD Roadmap for 211). First, robust growth in the global economy is expected to keep investors risk appetite and commodity prices on a solid footing, supporting demand for growth-sensitive currencies like the NZD/USD. Reuters pg BNZWFWDS We ve seen the first evidence of this already. Recent US data suggest activity, particularly in the manufacturing sector, is gaining momentum; the latest PMI s for China were consistent with a slowing, but certainly not a stalling in growth; and there are even pockets of strength to be found in the UK and Europe. Witness last week s increase in the UK manufacturing PMI to 58.3 in December (57.2 expected) from 58., and the huge increase in November German factory orders (2.6%y/y vs. 15.9% expected). Reflecting the renewed confidence in the global recovery, the S&P5 increased 1.2% last week and our risk appetite index (which has a scale of -1%), rose to 76%, well above the 5% long run average. Second, we expect the NZ economy to record above-trend growth next year. Forecast growth of 5%y/y through 211 should comfortably exceed that of most of our trading partners, and prompt a series of interest rate hikes from the RBNZ. Such an outcome would see NZ-US interest rate differentials widen, bolstering the appeal of the NZD/USD for yield-hungry investors. Our forecasts have the NZD/USD drifting up to a peak of.8 by June. We re not talking about a substantial appreciation but the important point is that folk should not expect a marked fall in the currency as long as NZ growth outpaces our trading partners and NZ commodity prices remain elevated. mike_s_jones@bnz.co.nz Foreign Exchange Technicals NZD/USD Outlook: Sell a rally ST Resistance:.7645 (ahead of.7675) ST Support:.755 (ahead of.745) The downward pressure on Euro is keeping sentiment in a weakened state, and as long as NZD stays below.765, an attempt at.745 should result later in the week. tyler_cory@bnz.co.nz NZD/AUD Outlook: This week target slightly higher levels ST Resistance:.77 (ahead of.776) ST Support:.757 (ahead of.74) The short market has unwound to some degree, and sustaining above.757 is very key for a continuation higher. The gains will likely be slow, but a push into is very likely this week. NZD/USD Daily Source: Reuters NZD/AUD Daily Source: Reuters research.bnz.co.nz Page 4

5 Key Upcoming Events Forecast Median Last Forecast Median Last Monday 1 January NZ, Merchandise Trade, November -$247m -$15m -$319m NZ, Paymark Transaction Data Aus, Construction PMI (AiG), December 42.2 Aus, Retail Trade, November s.a. -.2% +.3% -1.1% China, Trade Balance ($US), December +$22.9b Tuesday 11 January NZ, QSBO, Q4 +6 NZ, Building Consents, November (res, #) -2.% Aus, International Trade, November +$3.b +$2.5b +$2.62b Aus, ANZ Job Ads, December +2.9% UK, BRC Retail Sales Monitor, December y/y +2.8% US, Wholesale Inventories, November +1.% +1.9% Wednesday 12 January Aus, Housing Finance, November -2.% -1.% +1.9% Jpn, Eco Watchers Survey (outlook), 41.4 Euro, Industrial Production, November +.5% +.7% UK, Industrial Production, November +.5% -.2% UK, Trade Balance, November - 3.8b - 3.9b US, Beige Book US, Treasury Budget, December -$83.5b -$91.4b Thursday 13 January NZ, QVNZ House Prices, December +.3% NZ, Electronic Card Transactions, December +1.1% NZ, ANZ Comdty Prices ($NZ), December +1.4% Aus, Employment, December +3k +25k +55k China, Leading Index (Conference Board), Nov +.9% Jpn, Machinery Orders, November +2.% -1.4% Euro, ECB Policy Announcement 1.% 1.% 1.% UK, BOE Policy Announcement.5%.5%.5% US, PPI ex-food/energy, December y/y +1.4% +1.2% US, International Trade, November -$4.9b -$38.7b Friday 14 January Euro, Trade Balance, November + 3.3b + 5.2b UK, PPI (core output), December y/y +3.% +3.3% US, CPI ex food/energy, December +.7% +.8% US, Industrial Production, December +.5% +.4% US, Mich Cons Confidence, January 1st est US, Retail Sales, December +.8% +.8% Historical Data Today Week Ago Month Ago Year Ago Today Week Ago Month Ago Year Ago CASH & BANK BILLS Call mth mth mth mth GOVERNMENT STOCK 11/ / / / / CORPORATE BONDS BNZ 5/ BNZ 9/ FON 4/ FON 3/ GEN 3/ GEN 3/ TRP 6/ SWAP RATES 2 years years years years FOREIGN EXCHANGE NZD/USD NZD/AUD NZD/JPY NZD/EUR NZD/GBP NZD/CAD TWI NZD Outlook TWI New Zealand Dollar NZD TWI NZD/USD (rhs) Source: BNZ, RBNZ F/C NZD/USD research.bnz.co.nz Page 5

6 Contact Details BNZ Research Stephen Toplis Head of Research +(64 4) Craig Ebert Senior Economist +(64 4) Doug Steel Economist +(64 4) Mike Jones Strategist +(64 4) Main Offices Wellington 6 Waterloo Quay Private Bag 3986 Wellington Mail Centre Lower Hutt 545 New Zealand Phone: +(64 4) FI: Fax: +(64 4) Auckland 8 Queen Street Private Bag 9228 Auckland 1142 New Zealand Phone: +(64 9) Toll Free: Christchurch 129 Hereford Street PO Box 1461 Christchurch 814 New Zealand Phone: +(64 3) Toll Free: National Australia Bank Peter Jolly Head of Research +(61 2) Alan Oster Group Chief Economist +(61 3) Rob Henderson Chief Economist, Markets +(61 2) John Kyriakopoulos Currency Strategist +(61 2) Wellington Foreign Exchange Fixed Income/Derivatives Sydney Foreign Exchange Fixed Income/Derivatives +(61 2) London Foreign Exchange Fixed Income/Derivatives +(44 2) New York Foreign Exchange Fixed Income/Derivatives Hong Kong Foreign Exchange +(85 2) Fixed Income/Derivatives +(85 2) HOUR FOREIGN EXCHANGE SERVICE Phone Toll Free 6am to 1pm NZT Wellington Office pm to 6am NZT London Office Sam Hehir ANALYST DISCLAIMER: The person or persons named as the author(s) of this report hereby certify that the views expressed in the research report accurately reflect their personal views about the subject securities and issuers and other subject matters discussed. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. Research analysts responsible for this report receive compensation based upon, among other factors, the overall profitability of the Markets Division of National Australia Bank Limited, a member of the National Australia Bank Group ( NAB ). The views of the author(s) do not necessarily reflect the views of NAB and are subject to change without notice. NAB may receive fees for banking services provided to an issuer of securities mentioned in this report. NAB, its affiliates and their respective officers, and employees, including persons involved in the preparation or issuance of this report (subject to the policies of NAB), may also from time to time maintain a long or short position in, or purchase or sell a position in, hold or act as advisors, brokers or commercial bankers in relation to the securities (or related securities and financial instruments), of companies mentioned in this report. NAB or its affiliates may engage in these transactions in a manner that is inconsistent with or contrary to any recommendations made in this report. NEW ZEALAND DISCLAIMER: This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. Bank of New Zealand strongly recommends readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication. US DISCLAIMER: This information has been prepared by National Australia Bank Limited or one of its affiliates or subsidiaries ( NAB ). If it is distributed in the United States, such distribution is by nabsecurities, LLC which accepts responsibility for its contents. Any U.S. person receiving this information wishes further information or desires to effect transactions in the securities described herein should call or write to nabsecurities, LLC, 28th Floor, 245 Park Avenue, New York, NY 1167 (or call (877) ). The information contained herein has been obtained from, and any opinions herein are based upon, sources believed to be reliable and no guarantees, representations or warranties are made as to its accuracy, completeness or suitability for any purpose. Any opinions or estimates expressed in this information is our current opinion as of the date of this report and is subject to change without notice. The principals of nabsecurities, LLC or NAB may have a long or short position or may transact in the securities referred to herein or hold or transact derivative instruments, including options, warrants or rights with securities, or may act as a market maker in the securities discussed herein and may sell such securities to or buy from customers on a principal basis. This material is not intended as an offer or solicitation for the purchase or sale of the securities described herein or for any other action. It is intended for the information of clients only and is not for publication in the press or elsewhere. National Australia Bank Limited is not a registered bank in New Zealand. research.bnz.co.nz Page 6

Markets Outlook. Warning: Wobbly Data Ahead. 11 October Page 1

Markets Outlook. Warning: Wobbly Data Ahead. 11 October Page 1 Markets Outlook 11 October Warning: Wobbly Data Ahead We remain optimistic for growth in 11 Despite growing weather risk to primary production This week heralds the start of wobbly data As weather events,