A Sapping Start to 2018

Transcription

1 RESEARCH Markets Outlook 5 June 2018 A Sapping Start to 2018 We remain cautious about Q1 GDP Eyeing building and wholesale partials this week Business expectations still lagging As impending fiscal stimulus offset by costlier fuel But core growth seems sound (corroborated by tax) More foreigners deemed buying NZ property? A Big Hiccup? qtly % change Construction Indicators Construction GDP Ready-mix concrete For a while now we have been cautious regarding March quarter GDP. We remain so. Last week s Overseas Trade Indexes affirmed a big drag from net exports of goods in Q1. Technically speaking, this suppressed our expenditure-gdp growth estimate to next to nothing (even though the strong signals on core import activity, from the OTI data, told of robust expansion in domestic demand). Our production-gdp growth estimate, meanwhile, has edged down to 0.5% (2.7% y/y). But this is still sweating on the three remaining key partials holding together, when any one of them could easily drop a clanger. Two of these are due this week (with the third, Q1 manufacturing data, scheduled for Monday next week). The Q1 Building Work Put in Place figures are due Wednesday morning. While we are picking a 1% fall in the volume, already-released concrete production statistics warn of a bigger drop. Any confirmed decline for Q1 building activity would not be the start of any rot, however. While the leading indicators on construction were looking a bit wobbly three to six months ago, they have more recently firmed up. On Friday, Statistics NZ is scheduled to publish the Q1 Wholesale Trade figures. We expect these to show a quarterly increase in the range of 0.5 to 1.0%, in value Slow Out Of The Starting Blocks Quarterly % change Gross Domestic Product Trend Source: BNZ, Statistics New Zealand Quarter Quarterly Source: Statistics NZ, BNZ terms. This would infer a modest increase in real terms. But this is vulnerable to the indications of weak vehicle deliveries in the March quarter (probably partly related to importation hold-ups because of stink-bug fumigation issues). But also the relative lack of meat and dairy processing in Q1, after the big dry of late But as much as we are nervous on Q1 GDP, we still believe that GDP growth in Q2 will largely make up for it. Indeed, as we ve revised down our Q1 GDP growth estimate to 0.5% (from 0.6%) we ve nudged up our expectation for Q2 to 0.8% (from 0.7%). From there it should be even more solid, with annualised GDP growth of around 4% over the second half of 2018, aided by fiscal stimulus. This is not the view espoused by New Zealand s business sector, however. At least not the lot surveyed by the ANZ bank. Its survey last week inferred GDP growth might struggle to reach 2% over the course of Business confidence and activity expectations certainly remain a fly in the ointment. But we d prefer to see how they look after the mid-year fiscal stimulus package hits the system. Then again, if there is to be disappointment in New Zealand s GDP performance, we would spotlight business investment over the medium term, and consumer spending over the nearer term. Consumer expenditure in the June quarter is certainly worth thinking through. April s electronic card transactions definitely got the Q2 arithmetic off to a poor start. So we ll need to see a clear bounce-back in May and June to carry the idea of a decent increase the June quarter s real retail trade. bnz.co.nz/research Page 1

2 Sapping c/l Source: Statistics New Zealand, BNZ Yet we re also mindful of the impact that the spike in fuel prices over the last couple of months is having on households. It s been totting up to the high hundreds of millions, on an annual basis. In this sense, it is digging a hole that the impending the fiscal package will largely fill in, more than anything else besides. And, of course, unless you re a low to middle income family, or beneficiary, your household won t be in for much, if anything. In this vein, we note that consumer confidence, from having been quite strong going into last year s election, has since dissipated to about average. At its core, however, New Zealand s economic expansion does appear robust. This is certainly the message from tax revenue. This morning s Crown financial accounts registered annual growth in tax of 4% in April, after 14% in March. Taking the three months to April the annual increase was 7% - involving 3% with respect to GST, 8% from individuals (mainly PAYE) and 9% with regard to corporate tax. Core Robustness Ann % change in 3m totals Retail Petrol Prices Quarterly Total Tax Revenue BNZ estimate for Q Ouch! For the record, core Crown tax revenue was almost exactly in line with Budget expectations (overall core Crown revenue came in $138m above plan, but because of higher than expected royalty revenue). Expenses were running $259m under Budget. Net Crown debt as at 30 April 2018 was $62.5b, or 22.1% in proportion to nominal GDP. This was broadly in line with Budget expectations. We also have some local commodity news this week. It begins with Wednesday s early morning dairy auction. This has a range of tug-of-war forces bearing on prices. These will probably largely net out to little movement in the overall price index, is our guess. Broadly speaking, dairy prices are robust, as has been reflected in recent milk price forecasts by Fonterra. Wednesday afternoon s ANZ commodity export prices will likely record a small increase in world price terms, overall, and a more definite increase when converted into local currency. This would underline New Zealand s terms of trade as being still near record highs, even with the small dip they registered in the Q1 OTI report last week (and the more recent hike in oil prices). May s ANZ jobs ads, due Wednesday, will reveal whether their rate of growth continues to dissipate. It s something to keep tabs on, in the context of the recent moderation in employment intentions from the NZ business sector (albeit not obviously slipping below par at this stage). Thursday s Quotable Value NZ housing report will give its usual insight into the market, albeit as activity in May naturally starts to slow going into the winter. The Reserve Bank certainly thought the recent housing market data has been soft again. Also note that Statistics NZ is, on Thursday morning, set to release the Property Transfer statistics it now oversees. Previously the province of Land Information NZ, these data, for Q1 2018, will show who is buying and selling property in New Zealand, foreign and local. It s obviously a hot topic or, at least it was during last year s election campaigning. Statistics NZ will hopefully clarify what s been going on in this space, including in the measurement of the data itself. Perhaps it will show more foreign buying of NZ property than previously estimated, but with a petering trend nonetheless? recession Excludes $1.4b tax revenue from banking tax cases, June 2009 craig_ebert@bnz.co.nz -20 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13 Dec-16 Source: NZ Treasury Monthly bnz.co.nz/research Page 2

3 Global Watch G7 leaders likely to talk on trade, tariffs, tensions at end of the week Will these factors weigh on this week s China May trade data? Services PMI figures due in China, US, EU, and UK A busy week in Australia with BoP, RBA, GDP, and trade EU to finalise Q1 GDP at 0.4%? Australia The Q1 Balance of Payments report today will reveal the net exports contribution to GDP we look for a small positive contribution. Chart 1: Australia s Balanced Growth Outlook investment outlook remains relatively solid in an environment of accelerating infrastructure spending. House prices however have continued to ease in Sydney and Melbourne but at quite measured and gradual rates. There seems little in a material sense to deflect the RBA from its view that a return of inflation to its target range will continue, if at a still-expected gradual rate. The RBA is also likely to make some comment on what the partial data and its analysis suggests for Q2 GDP and whether this signifies any change from their May Statement forecasts. Wednesday s GDP figures are forecast to show the economy growing at reasonable rate of 0.8% q/q and 2.7% y/y. This suggests a pick-up in growth from the subdued 0.4%/2.4% outcome in Q4, which was driven by weak net exports and private investment. This quarterly outcome will be driven by domestic demand, the report to paint a picture of an economy where infrastructure spending is supporting growth and momentum in non-mining business investment continues to build, along with some support from consumption in recent quarters. Household consumption is likely to record another solid outcome in the quarter, though we think this could yet be short-lived and risks overstating the underlying pace of growth as consumers face up to higher utility and petrol prices, low wages growth, stalling growth in housing wealth and high debt levels. (NB: The NAB Cashless Retail Sales indicator also suggests a soft start to the June quarter for consumer spending.) A small fall in dwelling investment is expected as the turn in the construction cycle continues. Chart 2: Steady For A While Yet Net exports look to have made a small 0.2ppt contribution to growth, after a large subtraction in the previous quarter. Trade data on Thursday is again expected to report a sizeable trade surplus. Chart 3: Bulk Commodity Export Volumes All 26 of economists surveyed by Bloomberg expect that the RBA will remain on hold for the 20 th successive meeting. The statement from the RBA will be examined for any nuances and concern on global geopolitical issues and tensions as well as their review of the domestic economy. The housing market remains one focus for the monetary authorities, data suggesting that the dwelling bnz.co.nz/research Page 3

4 Global G-7 leaders meet next Friday. Under discussion no doubt will be trade and tariffs, and more on geopolitics including Iran, North Korea, and Italy. China/Asia China releases its trade data and Caixin Services PMI for May this week. The market will be alert to downside risks to export growth in the current environment of trade tensions. Inflation in Indonesia, Philippines and Taiwan are also released, most looking for firmer inflation signs to support monetary tightening. After Indonesia s intermeeting rate hike last week, Philippines may be next to start hiking rates in coming months. India will likely stand pat at its meeting this week. US A quiet week ahead with only the Non-manufacturing ISM tonight. Fed speakers go into lockdown ahead of the June 13 FOMC meeting when a further rate hike is expected. EZ Politics could well still be the driving factor with Italy still in the spotlight. Fears have largely receded with Five Star/League now into government and polls delivering a pro-euro vote. The data flow is quiet with only final versions of the Services PMI (Tuesday) and Q1 GDP (Thursday). UK Another quiet week where focus will be on the government s deliberations on the EU s future trading relationship with the UK after little to no progress over the past week. The choice will need to be finalised ahead of key Brexit bills that are scheduled for Parliament in early June. Data-wise it is quiet with only the Services PMI on Tuesday of note. David.deGaris@nab.com.au / Gareth.Spence@nab.com.au bnz.co.nz/research Page 4

5 Fixed Interest Market Reuters: BNZL, BNZM Bloomberg:BNZ Long-dated NZ swaps held their ranges last week, despite a significant bout of risk aversion during Tuesday and Wednesday related to Italy. The 10 year swap failed to break below 3% and likewise the 5y5y swap bounced off 3.55%. These levels have been tested multiple times over the past year and continue to hold, for now. As we observed last week, a 5y5y forward swap rate of 3.55% (the bottom of the recent range) is consistent with the market pricing the RBNZ s neutral cash rate of around 3.35% (assuming 20bps BKBM-OIS). That s below the RBNZ s latest estimate of the neutral cash rate of 3.50%. Unless (a) the market starts to seriously contemplate RBNZ rate cuts or (b) the market starts to question further Fed rate rises, we expect these trading ranges to hold, and would consider using dips to these range lows to add hedges. Chart 1: 5y5y and 10 year swap hold the range lows % NZ 10 year and 5y5y swap rates y5y NZ swap year swap Jan-15 Jan-16 Jan-17 Jan-18 Source: Bloomberg. Chart 2: OCR expectations remain near the lows The front-end remains relatively anchored compared to the moves at the longer-end of the curve. As such the yield curve remains very directional steepening when global long-end rates rise, and flattening when global rates fall. The market fully prices the first RBNZ rate rise for September next year, with a follow-up move priced for March % NZ 2 year swap rate vs. year ahead OCR expectations 2yr swap There is not much by way of either local or domestic data that s likely to move the market or change those OCR expectations this coming week. The next key release for the local market is GDP on the 21 st of June, with the RBNZ OCR Review to follow on the 28 th. Both short and longdated swaps should be range-bound in the meantime. With tensions in Italy having eased over recent days, the market again fully-prices a rate rise by the Fed on the 14 th June. The market prices an additional 32bps of rate rises over the remainder of the year (after June), consistent with the Fed s guidance. We view the current pricing of the Fed as broadly fair at the moment, and see the 10 year Treasury yield as within a grey zone of fair value. Housing New Zealand, a 100% Crown-owned entity, syndicated $250m of a 5 year and $250m of a 7 year bond last week, its first bond deals in almost twenty years. The bonds offer a spread of around 61bps and 74bps over the NZGB curve, which is slightly tighter than where LGFA bonds with similar maturities are marked this was in line with the expectations we outlined in our preview last week Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Source: BNZ, Bloomberg Year ahead OCR expectations Current Rates/Spreads and Recent Ranges nick.smyth@bnz.co.nz Current Last 3-weeks range* NZ 90d bank bills (%) NZ 2yr swap (%) NZ 5yr swap (%) NZ 10yr swap (%) s10s swap curve (bps) NZ 10yr swap-govt (bps) NZ 10yr govt (%) US 10yr govt (%) NZ-US 10yr (bps) NZ-AU 2yr swap (bps) NZ-AU 10yr govt (bps) *Indicative range over last 3 weeks bnz.co.nz/research Page 5

6 Foreign Exchange Markets Reuters pg BNZWFWDS Bloomberg pg BNZ9 The NZD is in the midst of recovering some of its significant losses during the major sell-off from mid-april through to mid-may. This recovery has come about despite the market-wobbles seen during the Italian markets meltdown and further downward pressure on emerging market currencies. This suggests to us that the period of strong selling pressure on the NZD is now well and truly over. We believe that poor positioning in mid- April excessively long positions near this year s highs in the NZD exaggerated the weakness in the NZD during the tumble. CFTC data show that net speculative positioning is now back down close to neutral. Fundamentally, we see short term fair value close to the USD 0.71 mark. Our fair value model estimate has been confined to a range over the past eight weeks and over the entire year to date. Risk appetite remains above average and NZ commodity prices have been on an upward trend this year, offsetting the negative headwind for the NZD from narrower NZ-US short-term interest rates. The domestic economic calendar in this holiday-shortened week is fairly light. More partial indicators are released ahead of next week s Q1 GDP figure. Partial indicators released to date suggest that growth was well below par in the March quarter. While the growth pothole is only expected to be temporary, ahead of fiscal stimulus beginning to kick in, the optics are poor and this might hold back the performance of the NZD over the next couple of weeks. By contrast, Australian Q1 GDP, due Wednesday, is expected to show solid growth of 0.8% q/q. Ahead of this release, NZD/AUD is struggling. After reaching a high of on Friday, the cross is nearly a cent weaker. This afternoon s RBA policy statement is expected to maintain a neutral policy bias and should pass with little market reaction. Our short term fair value NZD/AUD model estimate is just under the 0.92 mark. Alongside our view of similar economic and monetary policy outlooks for NZ and Australia, we have no strong view on the cross rate at present. Elsewhere, the global economic calendar is light this week. Rather than the economic calendar, we ll be more interested in the G7 leaders meeting that begins at the end of this week, where Trump will face a showdown following his aggressive stance on US trade protectionism. The market has brushed off the recent escalation in trade tensions as it sees Trump s tough talk as a negotiating tactic. Nevertheless, there is always the chance of some negative headlines to provide scope for commodity currencies like the NZD to be negatively impacted. NZD Recovers Despite EM Currencies Languishing Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Source: BNZ, Bloomberg NZD/AUD Close to Fair Value on All Models Long term Model FV jason.k.wong@bnz.co.nz JPM Emerging FX Index (rhs) NZD/USD (lhs) Source: BNZ, Bloomberg NZD/AUD Fair Value Models NZD/AUD Medium term Model FV Cross Rates and Model Estimates Current Short term Model FV Last 3-weeks range* NZD/USD NZD/AUD NZD/GBP NZD/EUR NZD/JPY *Indicative range over last 3 weeks, rounded figures BNZ Short-term Fair Value Models Model Est. Actual/FV NZD/USD % NZD/AUD % bnz.co.nz/research Page 6

7 Technicals NZD/USD Outlook: Trading range ST Resistance: (ahead of ) ST Support: (ahead of ) The recent recovery following the plunge of mid-april through to mid-may reduces the threat of the key support zone of being broken. Short-term resistance sits near NZD/USD Daily Source: Bloomberg NZD/AUD Outlook: Trading range ST Resistance: (ahead of ) ST Support: (ahead of ) A fairly messy short-term technical picture. We ll mark resistance near last week s high around and support at NZD/AUD Daily Source: Bloomberg jason.k.wong@bnz.co.nz NZ 5-year Swap Rate Outlook: Neutral ST Resistance: 2.80 ST Support: 2.60 Still in channel. Broke 2.60 during Italy but didn t close below level. Still range bound. NZ 5-yr Swap Daily Source: Bloomberg NZ 2-year - 5-year Swap Spread (yield curve) Outlook: Neutral ST Resistance: +57 ST Support: +43 Broke channel +39 during Italy but held horizontal resistance. NZ 2yr 5yrSwap Spread Daily Source: Bloomberg Rachel.A.Baxter@bnz.co.nz bnz.co.nz/research Page 7

8 Quarterly as at 5 June 2018 Key Economic Quarterly % change unless otherwise specified Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 GDP (production s.a.) Retail trade (real s.a.) Current account (ytd, % GDP) CPI (q/q) Employment Unemployment rate % Avg hourly earnings (ann %) Trading partner GDP (ann %) CPI (y/y) GDP (production s.a., y/y)) Interest Rates Historical data - qtr average Government Stock Swaps US Rates Spread Forecast data - end quarter Cash 90 Day 5 Year 10 Year 2 Year 5 Year 10 Year Libor US 10 yr NZ-US Bank Bills 3 month Ten year 2017 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Exchange Rates (End Period) USD NZD NZD/USD AUD/USD EUR/USD GBP/USD USD/JPY NZD/USD NZD/AUD NZD/EUR NZD/GBP NZD/JPY TWI-17 Current Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ TWI Weights 14.0% 20.7% 10.3% 4.8% 6.8% bnz.co.nz/research Page 8

9 Annual March Years December Years as at 5 June 2018 Actuals Actuals GDP - annual average % change Private Consumption Government Consumption Total Investment Stocks - ppts cont'n to growth GNE Exports Imports Real Expenditure GDP GDP (production) GDP - annual % change (q/q) Output Gap (ann avg, % dev) Household Savings (% disp. income) Nominal Expenditure GDP - $bn Prices and Employment - annual % change CPI Employment Unemployment Rate % Wages - ahote Productivity (ann av %) Unit Labour Costs (ann av %) External Balance Current Account - $bn Current Account - % of GDP Government Accounts - June Yr, % of GDP OBEGAL (core operating balance) Net Core Crown Debt (excl NZS Fund Assets) Bond Programme - $bn Bond Programme - % of GDP Financial Variables (1) NZD/USD USD/JPY EUR/USD NZD/AUD NZD/GBP NZD/EUR NZD/YEN TWI Overnight Cash Rate (end qtr) day Bank Bill Rate year Govt Bond year Govt Bond year Swap year Swap US 10-year Bonds NZ-US 10-year Spread (1) Average for the last month in the quarter Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ bnz.co.nz/research Page 9

10 Key Upcoming Events Forecast Median Last Forecast Median Last Tuesday 5 June NZ, Crown Financial Statements, 10m-ended-Apr 2018 Aus, RBA Policy Announcement 1.50% 1.50% 1.50% Aus, Current Account, Q1 -$9.9b -$14.0b Aus, BOP Goods and Services, Q1 prelim +0.5ppts -0.5ppts Aus, Services PMI (AiG), May 55.2 China, Services PMI (Caixin), May Jpn, Household Spending, April y/y (real) +0.8% -0.7% Euro, PMI Services, May 2nd est P Euro, ECB's Weidmann Speaks Euro, Retail Sales, April +0.5% +0.1% UK, Markit/CIPS Services, May US, Markit PSI, May 2nd est P US, ISM Non-Manuf, April US, JOLTS Job Openings, April 6,350 6,550 Wednesday 6 June NZ, ANZ Job Ads, May -2.1% NZ, ANZ Comdty Prices (world), May +1.0% NZ, Building Work Put In Place, Q1 vol s.a. -1.0% +1.4% NZ, Local Authority Statistics, Q1 NZ, Dairy Auction, GDT Price Index +1.9% Aus, GDP, Q1 +0.8% +0.8% +0.4% US, Productivity (non-farm), Q1 saar 2nd est +0.6% +0.7%P US, International Trade, April -$49.0b -$49.0b Thursday 7 June NZ, Property Transfer Statistics, Q1 NZ, QVNZ House Prices, May y/y +7.6% Aus, International Trade, April +$1.00b +$1.53b Aus, Construction PMI (AiG), May 55.4 Euro, GDP, Q1 3rd estimate +0.4% +0.4%P Germ, Factory Orders, April +0.8% -0.9% US, Jobless Claims, week ended 02/06 221k 221k Friday 8 June NZ, Wholesale Trade, Q1 ($) s.a. +3.0% China, Trade Balance, May +CNY243b +CNY183b Jpn, GDP, Q1 2nd est -0.1% -0.2%P Germ, Trade Balance, April b Germ, Industrial Production, April +0.3% +1.0% US, Wholesale Inventories, Apr 2nd est flat flat(p) Saturday 9 June China, PPI, May y/y +3.9% +3.4% China, CPI, May y/y +1.8% +1.8% 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 03/ / / / / / / / SWAP RATES 2 years years years years years FOREIGN EXCHANGE NZD/USD NZD/AUD NZD/JPY NZD/EUR NZD/GBP NZD/CAD TWI GLOBAL CREDIT INDICES (ITRXX) Australia 5Y Nth America 5Y Europe 5Y bnz.co.nz/research Page 10

11 Contact Details Stephen Toplis Head of Research Craig Ebert Senior Economist Doug Steel Senior Economist Jason Wong Senior Markets Strategist Nick Smyth Interest Rates Strategist Main Offices Wellington Level 4, Spark Central Willis Street Private Bag Wellington Mail Centre Lower Hutt 5045 New Zealand Toll Free: Auckland 80 Queen Street Private Bag Auckland 1142 New Zealand Toll Free: Christchurch 111 Cashel Street Christchurch 8011 New Zealand Toll Free: National Australia Bank Peter Jolly Global Head of Research Alan Oster Group Chief Economist Ray Attrill Head of FX Strategy Skye Masters Head of Fixed Income Research Wellington Foreign Exchange Fixed Income/Derivatives Sydney Foreign Exchange Fixed Income/Derivatives New York Foreign Exchange Fixed Income/Derivatives Hong Kong Foreign Exchange Fixed Income/Derivatives London Foreign Exchange Fixed Income/Derivatives 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: If this document is distributed in the United States, such distribution is by nabsecurities, LLC. This document is not intended as an offer or solicitation for the purchase or sale of any securities, financial instrument or product or to provide financial services. It is not the intention of nabsecurities to create legal relations on the basis of information provided herein. National Australia Bank Limited is not a registered bank in New Zealand. bnz.co.nz/research Page 11