Healthy Adjustments. And so we re inclined to view the recent, further, fall in the NZ TWI as principally a portfolio shift.

Transcription

1 Healthy Adjustments Market turmoil just a healthy correction? Lower TWI ups the case for OCR increases May s immigration, tourism, more positive Farm aid for Thursday s ANZ business survey And did the RBNZ really sell more NZD in May? Ructions in financial markets are normally a sign of trouble and so tend to have dovish implications for interest rates. However, this latest turmoil tends to reinforce the case/risk for higher rates. And especially so for the NZ OCR, in that one of the main fall-outs has been a trade-weighted exchange rate (TWI) looking more and more likely to undershoot RBNZ expectations, amid no real change in the local economy s outlook. Importantly, the NZ TWI has abated principally on a strong bid for the US dollar, on account of the US Federal Reserve s talk of winding back its vast buying of US government debt, along with the general risk-off behaviour this has engendered. The liquidity squeeze in China s inter-bank market over the previous couple of weeks (since moderated) has only added to the risk-off theme. Granted, the adjustments in global equities, bonds, commodities and credit spreads over recent weeks have been abrupt. However, they don t look out of the ordinary on a longer-term perspective. Look at a multi-year chart on equities, for instance, and one might wonder what all the fuss is about. Is what we re seeing, therefore, no more than a healthy correction, with markets having previously gotten far too frothy based on overly optimistic QE expectations and its perceived longevity? It s not as though the world s economic data have fallen off a cliff. Granted, the weaker China (HSBC) PMI for June, at 48.3, was a sign its economy is slowing by more than Annual average % change Consensus Global GDP Source: Consensus Forecasts, BNZ Twelve Month Ahead Forecast Average Forecast Date the new regime desires. However, the bulk of the world s economic information over recent weeks has been about as mixed as it s been for a while now. This is reflected in barely-changed Consensus forecasts on global GDP growth, inferring little change in New Zealand s tradingpartner growth expectations. And so we re inclined to view the recent, further, fall in the NZ TWI as principally a portfolio shift. Sure, in the context of these financial market adjustments, we should also be on the lookout for accompanying weakness in commodity prices for what New Zealand exports, that is. In this vein, it s worth noting that dairy prices actually rose at the international auction last week, helping justify the higher dairy payout forecasts recently announced by Fonterra. We also need to be careful about knee-jerk reacting to the week to week moves in the exchange rate. Fundamentally, we still believe the currency will be underpinned by the robust path we believe the NZ economy is on, meaning a fight back in NZD is likely into end-213/early-214, after this latest dust settles. Capital Index 2 Global Equity Index 85 Index NZ Dollar TWI Forecasts Latest, 24 June RBNZ central scenario 5 6 RBNZ Higher exchange rate scenario 55 Scenario based on current exchange rate deviation from central scenario 1/1/199 1/1/1995 1/1/2 1/1/25 1/1/21 Monthly Source: Datastream, Morgan Stanley, BNZ Source: RBNZ, BNZ Quarterly Average

2 Still, we also have to acknowledge that, far from contemplating any reduction in the NZ TWI, the RBNZ, in its June MPS, was most worried about it rising to a 8 level (to the point of invoking OCR cuts, plural, under that scenario). Instead, and from the Bank s central view of a 77.4 level out to March 214, the TWI is currently down at 73.. That s a 5.6% deviation that, indicatively, is equivalent to 14 basis points of OCR easing, using a 4:1 MCI (holding all else equal, of course). Underneath this all, of course, has been a back-up in global yields yet another upside pressure on NZ rates. Still, the main theme is of coming off extremes, in this case extreme lows (which is basically what the markets are trying to get their heads around at the moment). NZ interest rate markets have certainly responded to this global context. They have sold off to the point of now aligning to our view of an earlier (March 214) start to OCR hikes than the 214 Q3 point signalled by the RBNZ in its June MPS. However, we wonder if local rate markets fully appreciate the way in which the weaker TWI, as mainly a portfolio adjustment, increases the odds of more OCR hikes, and sooner (reinforcing what the economic outlook is doing already). For the meantime, we retain our view of a first 25bp policy rate hike in March 214, to 2.75%, a 3.25% OCR by June 214 and a peak of 4.5% around mid-215. But the risks of a more front-loaded schedule of normalisation do bear thinking about (or that of more catch-up by the RBNZ, in due course). We appreciate the Reserve Bank has recently shown a preference for keeping the OCR exceptionally low for at least another 12 months. However, even it won t be able to resist the pressure we see emerging, especially with one of the last perceived excuses the high NZ dollar wearing thin. Push will come to shove. Still, there is a lot to keep tabs on over the coming days and weeks, especially to see how these market moves play out. As we do so, we ll be keeping a close eye on New Zealand s TWI (can it bounce back any?) and, from a macro-economic source that could yet spoil things, China s slowdown (and its impact on Australia). As for the NZ data, they continue thick and fast this week. Thursday s ANZ business survey is arguably the pick of the crop and seems prone to get a boost from its farming component, following the upgraded dairy pay-out. Last month the survey was broadly consistent with our upbeat economic views. The local data are already underway courtesy of this morning s International Travel and Migration report. This showed New Zealand s net gain of migrants picked up further in May, with a seasonally adjusted +174, from +16 in April. This is becoming important. These last 3-month (s.a.) annualised Source: BNZ, Statistics NZ Migration Flows Monthly couple of months annualise to about 2,, which is now a solid positive, and about half way to what s considered very strong by historical standards. And it looks to be fundamental, involving decreasing migration to Australia (understandable give the cooling resources boom over there), along with increasing migrant inflows from the wider world. This can only add to demand pressure, importantly so in respect to the housing market. We know Governor Wheeler has in recent speeches noted the increase in net immigration and so these latest results can only pique his interest more. Note: rising immigration is more an issue for the OCR than anything directly relevant to macroprudential tools. But it wasn t just net migrant inflows that were strong in May. So too were the short-term visitor arrivals. May s numbers were 8.7% up on a year ago. Very much underpinning this was the fact the annual rates of increase from China were near 3%. It s another example of how China is fast becoming a bigger trading partner of New Zealand s to the point of nipping at the heels of the long-time number one partner, Australia. However, we would also point out that expectations for Australian arrivals over the coming months have no doubt been boosted by the voluminous early snow New Zealand s ski fields have received over the recent weeks of inclement weather. In terms of this afternoon s credit card billings for the month of May, only a big negative or positive would be of any consequence. By and large, spending trends appear reasonably positive. As for Thursday s merchandise trade figures, also for May, they will be most important for showing drought impacts on export volumes and prices. We re still waiting for some shoes to drop in terms of dairy export volumes, which is implicit in the 2% annual increase we re picking in nominal goods exports (in spite of high dairy prices). We have pencilled in a 2% fall in imports, y/y, which would deliver a monthly surplus of $427m, close to (if not bang on) market expectations. Inflow Outflow Net

3 Net % expecting increase (s.a.) Source: Statistics NZ, BNZ, ANZ Business Expectations and GDP Monthly Real GDP (rhs) Own-activity expectations (advanced 6 months) BNZ Forecasts Annual % change NZD, million RBNZ Net NZD Purchases -16 Jul-4 Jul-5 Jul-6 Jul-7 Jul-8 Jul-9 Jul-1 Jul-11 Jul-12 If May s merchandise trade figures prove weaker than this they might begin to cast aspersions on the.5% increase we expect of Q2 GDP but would unlikely aggravate current account concerns now, in that the external deficit is looking more and more likely to keep slimming on an annual basis this year (before enlarging anew over 214/15). The Reserve Bank of New Zealand s latest FX transactions data are due Thursday 3:pm. Will these reveal more net selling of NZD by the Bank in May? It could hardly be much less than the moderate amount that turned out to be the case for April? What s clear is that far greater forces explain the fall in the NZ dollar over recent months, as was always going to be the case. Also note that Statistics NZ is scheduled to publish its Regional GDP estimates Friday morning (1:45am). But nothing more than another snapshot, covering the years to March this time, which, we note, predates the earthquakes. We ve made a lot of good progress since then. Friday morning s building consents just need to hold roughly steady for May to secure the big gains of April, while the afternoon s credit aggregates will likely keep exhibiting a pickup. Both reports should further question the need for the RBNZ to persevere with interest rates normally reserved for times of deep economic recession. Ultimately, there are dangers in folk becoming dependent on sizable degrees of central bank stimulus, as recent global market ructions attest to. craig_ebert@bnz.co.nz

4 Fixed Interest Market Reuters pgs BNZL BNZM Bloomberg pg BNZ BNZ The NZ short-end remains reluctant to price much more than 125bps of hikes in the coming two years. By contrast, we see 2bps of rates hikes from the RBNZ, taking the OCR to 4.5% by mid-213. However, for now, 2-year swap, at 3.22%, sits at its highest level since October 211. We have revised our long-held end-year forecast for 2-year swap from 3.4% to 3.6%. This reflects our belief that momentum in the NZ economy will be increasingly reflected in higher OCR expectations. In addition, globally, yield curves have likely now moved to higher ranges. Still, even our revised forecast assumes the market remains reluctant to fully price our own OCR trajectory. Actual fair value for 2-year, at year-end, based on our OCR forecasts is 4.%. 5-year swap remains a point of significant liquidity in the NZ market, and the maximum point at which many businesses are willing/able to fix to hedge against future interest rate risk. Consequently, 5-year swap has surged higher to sit at 3.94% currently. Along the road to higher yields by year-end there will no doubt be dips driven by domestic or global developments. However, we see these dips as being relatively shallow/short-lived as there now appears to be increased interest from the real economy to use such dips as hedging opportunities. In this regard, it is worth noting that recent RBNZ data show around 75% of NZ mortgages remain floating or fixed for less than one year. The 2-1s swap curve has burst through the top of its year-to-date range, to sit around 132bps. Some further imminent steepening is likely as the NZ long-end of the curve follows US yields higher. However, assuming US yields find a new trading range we would be looking to position for a bear flattening of the NZ curve in 2H. i.e short-end yields moving up faster than long-end. Meanwhile NZ bonds continue their sell-off but with decreased ferocity. As a consequence, NZ swap-bond spreads have narrowed. At these levels (1-year dipped as low as below 35bps last week) we would not be surprised to see some buying of NZGBs relative to swap. The yield on NZ 1-year bonds now sits at 4.14%, its highest level since April last year. The next DMO auction of nominal bonds ($3m) is not scheduled until 18 July. Assuming the global sell-off in bonds has run out of momentum by then, some improved demand for NZGBs may be seen at this point. However, the DMO s revised issuance schedule is very lumpy i.e. nominal bonds offered once a month as opposed to weekly, which makes auctions highly susceptible to sentiment at that precise time. Sentiment toward Fed policy will remain at the forefront this week. There is the usual scattering of US data releases such as consumer confidence, pending home sales and the Chicago PMI scheduled. However, Federal Reserve members are also out in force, no doubt giving their individual spin on the Chairman s latest message. Voting members may have some ability to influence market expectations. While momentum can easily take US 1-year yields quickly up to the % level, we would be wary of getting carried away by momentum. What could cause US yields to pull-back in coming months? would instead be the question we would be asking. Clearly data delivery is crucial, and rising yields may in themselves impact on data delivery. If rising yields undermine the growth outlook about which the Fed has expressed optimism, it could be forced to soften tapering rhetoric. Alternatively, if US employment data does not improve as expected or US inflation shows no sign of picking up, the tapering schedule will also likely be revisited. Finally, if the eerie quiet in Eurozone is broken by some negative risk event, this could reignite demand for safe haven bonds. For this week, the NZ data highlight will be Thursday s ANZ business confidence survey. This will likely tell a now familiar story of broad-based optimism; certainly nothing to derail an upward drift in OCR expectations. change (bps) 9 day bills 4/15 NZGB kymberly_martin@bnz.co.nz 4/23 NZGB 2yr swaps s/a 1yr swaps s/a 2yr/1yr swaps(bps) 14-Jun % 2.68% 3.73% 3.4% 4.19% Jun % 2.84% 4.1% 3.18% 4.49% 131 Change (bps) Key Fixed Interest Views kymberly_martin@bnz.co.nz Category 24-Jun-13 Tactical (1w) Strategic (12mth) Comments NZ Money Markets OCR 2.5% The market prices 55bps of OCR hikes in the year ahead. We see the OCR 75bps higher by this time next year, after a 25bps first hike in March. NZ Swap Yields 2-year 3.22% Near-term upside limited by market's reluctance to price much more than 125bps RBNZ hikes in coming two years. We see 2bps of hikes. 5-year 3.94% Our core stragegic view is for higher lows and higher highs on yields. And dips likely short-lived due to payers in the 'real economy'. 1-year 4.54% Near-term long-end likely has further to run following US yields higher. NZ Swap Curve 2s-1s 132bps Curve has surged higher, and likely has further to go, but we would be looking for opportunities to position for 'bear' flattening in H2. NZ Bond Yields NZGB 23s 4.14% US yields likely to exert upward pressure on yields, but some buying relative to swap likely to emerge. NZ Swap-Bond Spread 1-year 42bps We see a range between around 35-6bps as being justified over the medium-term. Some widening from bottom of range likely near-term. US Bond Yields 1-year 2.53% Looking for US yields to find new trading range. Risks are momentum takes yields higher near-term, before a pull-back ensues. NZ-US Bond Spread NZ-US23s 161bps Potential for spreads to widen back above 18bps near-term. NZ-AU Bond Spread NZ-AU23s 39bps Some consoldiation around current levels is now likely. NZ Credit Spreads Financials NZ market tracking offshore moves and volatility albeit in subdued manner. Near-term outlook uncertain, but potential for continued weakness. Non-Fin As above.

5 Foreign Exchange Market Reuters pg BNZWFWDS Bloomberg pg BNZ9 Investor appetite for the greenback returned with a vengeance last week following confirmation that the US Federal Reserve is set to taper asset purchases later this year. Fuelled by a steep rise in US Treasury yields, the US dollar pushed higher against all of the major currencies. The high-beta AUD and NZD suffered more than most, the latter eventually testing 12-month lows close to.77. The focus for currency markets looks set to remain on the US this week, although we doubt last week s excitement and volatility will be repeated. There is a smattering of US economic data due for release. More important will be what a long line up of Fed officials have to say about the economic outlook and what it means for the tapering debate. The timing and speed of the Fed s expected asset purchase taper will be hotly debated in the coming weeks. While the market may have overreacted to last week s Fed missive, the fact that policy easing is likely to be wound up earlier than markets were previously expecting is a clear positive for US bond yields and the USD. For the NZD/USD, the brightening US outlook means the peak appears to be behind us. However, expectations that the currency will keep falling are misplaced. Lofty commodity prices, rising local interest rates, bearish speculative positioning, and building momentum in the NZ economy are all NZD supports we d need to see crumble before we d become convinced the NZD/USD is heading down to.7 and below. We re in the process of reassessing our NZD forecasts now, and will release a formal update later in the week. Local developments have taken a back seat lately as far as drivers of the NZD are concerned. Indeed, the currency looks oversold based on local fundamentals alone (see chart). This looks set to continue in the short-term as all eyes remain on the US. However, this week offers plenty of fodder for local economy watchers. The two data items with most relevance for the NZD will be 1) Thursday s ANZ business survey, which looks set to receive a leg-up from improved farming confidence, and 2) May data on RBNZ FX transactions. We suspect this will show net NZD selling by the RBNZ continued in May, albeit at a slower pace than in April. Overall, we expect consolidation to be the main theme in the NZD market this week. Positive local data and a short speculative market may limit the downward pressure from any additional USD gains. We look for a NZD/USD range. mike_s_jones@bnz.co.nz Charts o the week Index NZ TWI & Interest Rate Differentials Weighted Interest Rate Differentials (RHS)* Bps NZD TWI (LHS) Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 1 *Difference between NZ 2-year swap rates and a trade-weighted index of US, AU, JP, EU and UK rates Source: Bloomberg; BNZ

6 Technicals NZD/USD Outlook: Sell a rally ST Resistance:.788 (ahead of.7845) ST Support:.772 (ahead of.7667) Momentum is negative and should carry the currency lower once the current period of short covering has run its course. NZD/USD Daily Source: Bloomberg NZD/AUD Outlook: Buy a dip ST Resistance:.858 (ahead of.858) ST Support:.8365 (ahead of.8315) There are few if any technical barriers preventing further upside progress. A retest of the.85 highs looks likely. NZD/AUD Daily Source: Bloomberg mike_s_jones@bnz.co.nz NZ 5-year Swap Rate Outlook: Higher ST Resistance: 4.6% ST Support: 3.64% We have hit last week s target. With the sell off looking strong now, we expect 4.6 to be achieve this week. We suggest taking profit on the short position at this level. NZ 5-yr Swap Daily Source: Bloomberg NZ 2-year - 5-year Swap Spread (yield curve) Outlook: Steeper ST Resistance: +78 ST Support: +61 Steepening continues. Expect a move to +78 now. NZ 2yr 5yrSwap Spread Daily Source: Bloomberg pete_mason@bnz.co.nz

7 Key Upcoming Events Forecast Median Last Forecast Median Last Monday 24 June NZ, External Migration, May s.a NZ, Credit Card Billings, May +.3% Germ, IFO Index, June Tuesday 25 June US, Consumer Confidence, June US, Durables Orders, May +3.% +3.5% US, Shiller Home Price Index, April +1.6% +1.9% US, New Home Sales, May 46k 454k Wednesday 26 June Aus, ABREE Resources and Energy Qtly UK, CBI Dist Trade Survey, June US, GDP, Q1 3rd est +2.4% +2.4%P Thursday 27 June NZ, RBNZ FX Transactions, May -$256m NZ, Merchandise Trade, May +$427m +$427m +$157m NZ, ANZ Business Survey, June China, Industrial Profits, May ytd y/y +11.4% Jpn, All Industry Index, April +.4% -.3% Euro, Economic Confidence, June Germ, Unemployment Rate, June s.a. 6.9% 6.9% Thursday 27 June continued UK, GDP, Q1 3rd est +.3% +.3%P US, Personal Spending, May +.3% -.2% US, Jobless Claims, week ended 22/6 345k 354k US, Fed's Dudley Speaks, Labour Market US, Pending Home Sales, May +1.% +.3% Friday 28 June NZ, Building Consents, May (res, #) +18.5% NZ, Household Credit, May y/y +4.9% NZ, Regional GDP, Aus, Private Sector Credit, May +.2% +.3% +.3% China, MNI Business Sentiment, June flash 56.7 Jpn, Household Spending, May y/y (real) +1.3% +1.5% Jpn, Industrial Production, May 1st est +.2% +.9% Jpn, Unemployment Rate, May 4.% 4.1% Jpn, CPI, May y/y -.4% -.7% Germ, CPI, June y/y 1st est +1.7% +1.5% Germ, Retail Sales - vol, May +.4% +.4% US, Chicago PMI, June US, Fed's Stein Speaks, Monetary Policy US, Mich Cons Confidence, June 2nd est P 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 4/ / / / / / GLOBAL CREDIT INDICES (ITRXX) AUD 5Y N. AMERICA 5Y EUROPE 5Y 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 Source: BNZ, RBNZ New Zealand Dollar NZD/USD (rhs) Monthly NZD TWI NZD/USD F/cast

8 Contact Details Stephen Toplis Head of Research +(64 4) Craig Ebert Senior Economist +(64 4) Doug Steel Economist +(64 4) Mike Jones Strategist +(64 4) Kymberly Martin 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 81 Riccarton Road PO Box 1461 Christchurch 822 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) Ray Attrill Global Co-Head of FX Strategy +(61 2) Wellington Foreign Exchange Fixed Income/Derivatives Sydney Foreign Exchange +(61 2) Fixed Income/Derivatives +(61 2) New York Foreign Exchange Fixed Income/Derivatives Hong Kong Foreign Exchange +(85 2) Fixed Income/Derivatives +(85 2) London Foreign Exchange +(44 2) Fixed Income/Derivatives +(44 2) 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.