Credit Where It s Overdue

Transcription

1 Credit Where It s Overdue A record trade surplus for February? As latest data keep New Year growth pulse pumping Watch Fonterra announcement, Wednesday Feb s LVR ratio: another undershoot of 10% limit? But are mortgage approvals rebounding in March? In a relatively quiet data week, Thursday s merchandise trade report for February is the only one of any real note. We expect this to deliver more good news, as booming commodity export prices and strong primary production continue to inflate export returns. The 14% annual gain we ve pencilled in for exports, along with 4% for imports, would result in a monthly trade surplus of $839m. This is atop the market range although more for the relatively slower imports we have than anything especially stronger on exports. Anyone in any doubt about the economy s pulse might first want to have another look at the data that was published last week, though. And not only the solid GDP result of Q4 2013, but the raft of indicators suggesting growth is continuing with quite some force in The standouts were sky-high consumer confidence, booming net inward migration and strong gains in tourist arrivals (even now from Europe). Last week s data also confirmed the shrinking path the nation s current account deficit is on. If we re close to the truth on February s merchandise trade, the external deficit will remain on track to reduce to around 2.8% of GDP in the year to March, from the 3.4% ratio that was reported last week for calendar Not to mention that a +$839m result this Thursday would easily be a record February surplus in dollar terms and the highest as a share of exports in more than 20 years. Exports and Commodity Prices Annual % change Source: Statistics NZ, ANZ, BNZ Merchandise export values Monthly ANZ commodity price index (NZ$) "High" LVR Ratio (after exemptions) % Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Source: RBNZ Private Reporting LVR Survey LVR Speed Limit Still, these are not new stories. Fonterra s interim results due Wednesday will be along similar lines. While very high, we do not expect any change to current season payout forecasts. The marginal information around the current account indeed for the wider economy, and the exchange rate will be what happens to New Zealand s commodity export prices over the next months. We still believe the tendency in these will be downward, from recent extreme peaks, with dairy prices leading the way down. This process might already be well in train, judging by recent dairy auctions. Watch this space carefully. The only other NZ economic news to watch for this week is the LVR lending results for February and the latest weekly mortgage approvals data, as the RBNZ is due to publish collectively at 3:00pm Wednesday. Re the high (>80%) Loan to Value residential loans it s hard to imagine February s proportion (to total new housing loans for the month) will be much less than the 3.8% outcome of January (excluding exemptions). Given the recent degree of undershoot to the RBNZ-imposed 10% speed limit there might even seem scope for the high LVR lending to pick up, at some stage. This is where Wednesday s mortgage approvals for the week ended 21 March could help shed some light. We say this having seen the week ended 14 March data come in about unchanged on a year ago. This compared to negative annual comparisons in the order of -8% to -11% since the LVR restrictions were put in place in October last year (barring some obvious holiday distortions, that is).

2 Mortgage Approval Value ann % change, (week/week) LVR restrictions introduced Distorted by Labour Day holiday timing Distrorted by Christmas, New Year However, also bear in mind that once the six-month-to- March 2014 LVR results are on the board, for the RBNZ to mark, the main banks will then be subject to a 3-month rolling average on the LVR ratio. This means, in effect, a start from scratch for the June quarter onwards. And much still depends on the amount of low LVR lending able to be done, in order to make room for the high LVR component /08/ /08/ /09/ /10/ /11/ /12/ /01/ /02/2014 Source: RBNZ, BNZ Weekly Of course, even a couple of weeks worth of data should be nothing to draw strong conclusions from. And, volatility aside, any bounce in mortgage approvals might also just reflect a rush to fix although only if the mortgage holder changes banks (own-bank customer refinance is excluded in the mortgage approvals data, but refinancing of other banks customers is included). Or perhaps the LVR dampening effect is waning? Anyway, it s another something to keep an eye on. The backdrop to this, lest we forget, is of rising interest rates. To reiterate, we still expect rate hikes at each of the next three RBNZ meetings (April, June, and July). This would take the Official Cash Rate up to 3.50%. That s still relatively low but not as squat as it was at 2.50%. It will be very interesting to see how the economy copes with this first phase of normalising rates, as it might prove important for what happens after that. Will we see healthy signs of acceptance or worrying signs of dependence? craig_ebert@bnz.co.nz

3 Global Watch Australia This week is a very quiet data week in Australia, with the economic calendar showing only the HIA/CBA housing affordability index for Q4 on Thursday. RBA Governor Stevens is speaking on Wednesday in Hong Kong, at the Annual Credit Suisse Asian Investment Conference, while Deputy Governor Lowe is speaking at two separate events on Tuesday and Wednesday. However we are unlikely to hear anything new after the detail provided in the March policy meeting Minutes and Stevens Parliamentary testimony in the past fortnight. The RBA s Financial Stability Review is also out on Wednesday. The previous report in September reported that Australian banks were profitable and well capitalised with low arrears rates on their lending books, while households were also in good shape. Most interest will be on the housing market commentary and in particular house prices. No doubt it will again talk down any fears of a house price bubble, but last time there was a warning to property investors, with the RBA saying investors should have realistic expectations of future house price growth. China The data focus in China this week will be today s HSBC flash manufacturing PMI for March, after the February reading saw a fall to 48.5 from 49.5 in January. The slowing in manufacturing activity has partially been blamed on the timing of Chinese New Year, but it is certainly consistent with other activity indicators that have slowed in recent months. The median expectation is for a rise to 48.7 in March, so not much of a bounce. Otherwise it is a quiet week for Chinese data, with only Industrial Profits for February due on Thursday. Eurozone The impact of events in the Ukraine on eurozone business confidence is likely to be seen in survey data released over the course of the week. The flash estimates of French, German and eurozone PMIs for manufacturing and service sectors are released on Monday and are expected to show some moderation in the rate of expansion. Friday sees the publication of the EU Commission's end-of-month surveys for economic confidence and the business climate. Both have been improving as of late, but we suspect that we will see a small decline in both surveys. The German IFO survey tends to be much less volatile than the ZEW survey, but we suspect that the pattern seen in the ZEW, of declining expectations and rising current activity, will be repeated. A larger fall in the expectations component is expected to drag down the headline index after four consecutive months of increase. The outlook for eurozone monetary policy should become clearer as we get M3 growth for February, which we expect to show annual growth remaining unchanged at 1.2% in the three months to February compared with the same period a year earlier. German CPI could well touch lower, with a 0.4% rise on the month enough to push the annual rate down by 0.1pp to 0.9%. Should March see the usual increase in monthly inflation, then the eurozone annual growth rate would fall from 0.7% to 0.4% before rising in April, but that pattern could raise fears of deflation. United States With the FOMC Meeting behind us, focus in the US will return to the data, where the market will now start to look for improving activity to support the Fed s expectation that tapering will end in October and the fed funds rate will start to rise in the first half of The final estimates of Q4 GDP are released on Thursday, and an upward revision is expected to 2.7% from 2.4%. The Conference Board s measure of consumer confidence is expected to edge higher to 78.6 in March from 78.1, while durable goods are expected to rise around 1.0% in February after the 1.0% fall in January. Housing data however is expected to remain soft. Median forecasts show a slowing in house price growth in January, flat pending home sales in February and a 5% fall in new home sales in February. United Kingdom A busy data week. We look for the CPI to rise by 0.5% in February, in line with its long-run average, which would see the annual rate ease from 1.9% to 1.7% in line with consensus. We are a little below consensus in our forecasts for both RPI and RPIX, where we see the latter returning to its old target level of 2.5%. The February CBI Distributive Trades survey proved much stronger than expected, coming in at 37 vs 15 expected. In March our central forecast sees the index ease from 37 to 28, but recent comments from supermarkets suggest some downside risk. We look for a modest increase in retail sales volumes after January's 1.5% decline. A 0.2% rise in headline sales would see the annual growth rate almost halve from 4.3% to 2.3%, even as annual core sales, which exclude automotive fuel sales, ease from 4.8% to 2.9%. The MPC expect that Q4 GDP will be revised up from 0.7% to 0.9% in due course, but it is unclear whether this week will see any increase given minimal changes to back data since the second estimate was released. We therefore look for growth to remain unchanged at 0.7%, with an annual rate of 2.7%. The increase in net trade in Q4 implies that the current account will narrow from the 20 billion seen in Q3 and we look for a 14 billion deficit. We look for the GfK Consumer Confidence survey to ease from -7 to -8, which is still relatively high by historical standards. spiros.papadopoulos@nab.com.au

4 Fixed Interest Market Reuters pgs BNZL BNZM Bloomberg pg BNZ BNZ The short-end of NZ curve is still biased to push higher. But, it remains a tug-of war between domestic paying interest from the real economy (mortgage book/sme borrowers), and offshore receiving interest. There is still plenty of domestic payside interest. RBNZ data shows around 75% of all NZ mortgages are still floating or fixed for less than one year. However, we are seeing increased hedging activity now that forecast OCR hikes have reached the popular press. Offsetting this, we continued to see offshore receiving interest in the NZ short-end. Offshore investors may be less familiar with/convinced by, NZ domestic strength. Rather, they see the RBNZ s projected OCR track as an outlier in a world where other central banks remain firmly on hold until later next year. Ultimately, we believe the domestic weight of money will win the day and yields will drift higher. We continue to see current 2-year fair value around 4.30% based on our forecast OCR track. i.e that the RBNZ will steadily raise the OCR to 4.0% by the end of this year and 5.0% by the end of next. We see 2-year and 5-year swap at 4.80% and 5.20% respectively by year-end. The 2-10s swap curve has steepened to 106bps from below 100bps at the start of last week. We target 110bps as an exit level from near-term steepening. Longer-term we expect the 2-10s curve to flatten to a trough of 60bps over the coming 12 months. Meanwhile the yield on NZ 10-year bonds sits at 4.62%, near the top of its very tight % range of the past two months. More broadly, we anticipate a % range in the coming year. We see limited NZ DMO issuance limiting the sell-off in NZGBs despite a rising OCR backdrop. In this regard, Thursday s tender of $200m of NZGBs will be closely watched, particularly for offshore participation. At present, offshore holdings of NZGBs remain around 63%. The long-end of the NZ curve remains highly influenced by offshore moves. The annual correlation between weekly moves in US and NZ 10-year bond yields remains near historic highs at 76%. US 10-year yields pushed a little higher after the Fed s announcement last week. The Fed now projects a Fed funds rate at 1.00% at end 2015 and 2.25% at end But at 2.74% US 10-year yields still remain well within recent ranges. We suspect US long-yields will have a bias to drift higher this week, in the absence of a re-igniting of Ukraine fears. There are a handful of US data releases in the week ahead, including consumer confidence, manufacturing PMI, durable goods, and University of Michigan confidence. Throughout, the market will be looking for confirmation that early year US data softness was largely weather related. We continue to see a 2.50%-3.00% range for US 10-year yields in coming months. The top-side of the range could extend to 3.25% in the year ahead as Fed rate hikes come more clearly into view. It is a relatively low-key week ahead for NZ data. Thursday s trade report will likely be the highlight. Wednesday will also provide the latest two data points relating to the housing market - the RBNZ s LVR data for February and the latest weekly mortgage approvals. Overall, we suspect NZ yields will be biased to drift higher this week, absent negative global data or geopolitical shock. change (bps) 90 day bills kymberly_martin@bnz.co.nz 04/15 NZGB 04/23 NZGB 2yr swaps 10yr swaps 2yr/10yr swaps (bps) 14-Mar % 3.27% 4.52% 4.03% 5.02% Mar % 3.30% 4.62% 4.02% 5.08% 106 Change (bps) Key Fixed Interest Views Category 24-Mar-14 Tactical (1w-1m) Strategic (12mth) Comments NZ Money Markets OCR 2.75% We see a steady increase in the OCR to 4.0% by year-end. We forecast a 5.0% peak in the OCR by end-2015 NZ Swap Yields 2y 4.03% Now OCR hikes are a reality, payside flow will likely increase. Current 'fair value' is around 4.30% 5y 4.62% Biased to push higher. We see 5.20% at year-end 10y 5.08% Likely to follow a dirf higher in US long yields near-term NZ Swap Curve 2s-10s 106bps Above 110bps we would look to reposition for flattening. We see the curve flattening to a trough of 60bps in year ahead NZ-AU Swap Spreads 2y 110bps Biased to push higher near-term now OCR hikes are underway. We see spreads peaking around 160bps by year-end NZ Bond Yields NZGB 23s 4.63% Key test this week will be Thursday's DMO auction of $200m of NZGBs. We see a % range in the year ahead NZ Swap-Bond Spread 10y 38bps Biased to widen over medium-term though demand at this week's DMO auction may determine direction this week US Bond Yields 10y 2.74% Assuming no re-igniting of Ukraine concerns yields biased to drift higher NZ-US Bond Spread NZ-US 10y 189bps Near-term likely to stay in the lower half of the expected bps range NZ-AU Bond Spread NZ-AU 10y 57bps We continue to see a 40-90bps range in the year ahead

5 Foreign Exchange Market Reuters pg BNZWFWDS Bloomberg pg BNZ9 Last week, for the first time in a month, the NZD/USD failed to close at a higher level than where it opened. To be fair, this statement is true by the slimmest of margins the NZD/USD opened at on Monday morning, and closed at on Saturday morning. The blame for this can be laid firmly at the feet of new Fed Chair Janet Yellen. In the previous edition of this note, we suggested that Ms Yellen would not rock the boat, simply tapering asset purchases by another $10bn, and removing the 6.5% unemployment threshold. Ms Yellen delivered on that, and then some. Three features of the FOMC statement and the press conference afterwards stood out. Firstly, the Fed failed to downgrade the bottom-end estimate for 2014 GDP, despite the unusually harsh winter that decimated economic activity through January and February. Secondly, the collective wisdom of the FOMC s members inferred an upward revision to the policy rate track going forward, with expectations of the Fed Funds Rate 25bps higher by end-2015 and 50bps higher by end (compared to the previous projections. released in December). Last, Fed Chair Yellen implied that the first rate hike could be as soon as April 2015 (assuming an October 2014 end to tapering), earlier than the mid-2015 point the market had been coalescing upon. All up, this was a more positive endorsement of the US economy than many were expecting, and an overall more hawkish tone struck by the Federal Reserve. Since early January, the market had become more downbeat on the US economy, taking the US Dollar Index (DXY) within striking distance of a multi-year low at But Thursday s events put some bounce back into its step, and it currently sits We (like many analysts) have been frustrated by the lacklustre USD for some time, since our core FX views are based on a strengthening USD over the next two years. The tone of the Fed last week gives us reason to be optimistic again. Of course, the Fed s course is patently data-dependent, and investors will be parsing US data even more carefully from now. But it certainly feels like the Fed has jolted the market into looking at the USD more constructively. Looking ahead, the scheduled releases this week pose little threat to this nascent shift in sentiment. The only NZ data of note are the merchandise trade figures. But our minds wander back to last week s Global Dairy Trade result, which is more forward-looking. There, prices dropped below a well-worn range. The twin headwinds of a strengthening USD and moderating NZ commodity prices are key components of our view for a lower NZD/USD over the coming years. Could this be the start of the correction we ve been waiting for? raiko_shareef@bnz.co.nz Index 85 Chart 1: The US Dollar finally looks up US Dollar Index Charts of the week Chart 2: Commodity price moderation finally here? USD Index Dairy Auction Prices - GDT NZD Index USD terms NZD terms (rhs) Jan-13 Apr-13 Jul-13 Oct-13 Jan Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Source: GlobalDairyTrade, BNZ Weekly NZD/AUD NZD/GBP Weekly NZD Cross Outlook Monthly trade data due from NZ is likely to deliver more good news, but markets are well-versed in the primary production driven good news story. RBA Governor Stevens could well take a pot shot at the "high" AUD in his speech Wednesday. Last week, the MPC minutes noted that the GBP could continue to strengthen as the economic recovery gained momentum. The cross looks to be running out of steam, consolidating on its strong gain since mid-february. Last week s range NZD/EUR PMI readings for Germany and the euro-zone due tonight will set the tone for the cross for the week. Markets expect some slight easing in those numbers, unlikely to spark a convincing move in either direction for the cross Friday sees Japanese inflation and retail sales data, which should show (1) NZD/JPY momentum towards the 2% inflation target slowing, and retail front-loading ahead of the 1 April tax hike. More onus for the BoJ to ease further should weaken JPY. *According to our momentum model; **Taken from our Currency Flow Monitor, based on a sample of BNZ's corporate flow Momentum* (Last week) Positive (Positive) Positive (Positive) Positive (Positive) Positive (Positive) Client flows** (Last week) Below average (Above average) Below average (Above average) Below average (Above average) Below average (Above average)

6 Technicals NZD/USD Outlook: Sell a rally ST Resistance: (ahead of ) ST Support: (ahead of ) A quiet data week ahead, with range-trading likely to dominate. We eye support with some wariness. A foray toward should shake out some long positions. NZD/USD Daily NZD/AUD Outlook: Play the range ST Resistance: (ahead of ) ST Support: (ahead of ) Near-term support could be tested, as the cross slid towards it over the past week. But the more likely scenario is range-trading between , within a wider band. NZD/AUD Daily raiko_shareef@bnz.co.nz NZ 5-year Swap Rate Outlook: Higher ST Resistance: 4.77 ST Support: level has been breached. Expect an extension up to Any rally should be shallow and only a move below 4.48 would bring it into question. NZ 5-yr Swap Daily NZ 2-year - 5-year Swap Spread (yield curve) Outlook: Neutral ST Resistance: +61 ST Support: +49 We have seen continued flattening pressure. However, we are approaching the bottom ranges and expect this pressure to abate. +61 is now resistance and if that gets breached, it will show a reversal. NZ 2yr 5yrSwap Spread Daily pete_mason@bnz.co.nz

7 Key Upcoming Events Forecast Median Last Forecast Median Last Monday 24 March China, PMI (HSBC), March 1st est Euro, PMI Manufacturing, Mar 1st est Euro, PMI Services, Mar 1st est Tuesday 25 March Aus, RBA's Lowe Speaks, ASIC Forum China, Leading Index (Conference Board), February +1.2% Germ, IFO Index, March UK, CPI, February y/y +1.7% +1.9% US, New Home Sales, February 445k 468k US, Shiller Home Price Index, January +13.4% +13.4% US, Consumer Confidence, March Wednesday 26 March NZ, Mortgage Approvals, week ended 21 Mar -8.3% NZ, RBNZ LVR Data, February 3.8% Aus, Financial Stability Review Aus, Stevens Speaks, Credit Suisse Forum Aus, RBA's Lowe Speaks, CIFR Conference UK, CBI Dist Trade Survey, March US, Durables Orders, February +0.7% -1.0% Thursday 27 March NZ, Merchandise Trade, February +$839m +$600m +$306m China, Industrial Profits, Feb ytd y/y +12.2% Euro, M3, February y/y +1.3% +1.2% UK, Retail Sales vol., February +0.5% -1.5% US, Pending Home Sales, February +0.1% +0.1% US, GDP, Q4 3rd est +2.7% +2.4%P Friday 28 March Jpn, CPI, February y/y +1.5% +1.4% Jpn, Household Spending, February y/y (real) +0.1% +1.1% Jpn, Unemployment Rate, February 3.7% 3.7% Euro, Economic Confidence, March Germ, CPI, Mar y/y 1st est +1.1% +1.2% UK, GDP, Q4 3rd est +0.7% +0.7%P US, Mich Cons Confidence, Jan 2nd est P US, Personal Spending, February +0.3% +0.4% Monday 31 March NZ, Household Credit, February y/y +5.7% NZ, Building Consents, February (res, #) -8.3% NZ, ANZ Business Survey, March 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 04/ / / / / / 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 F/c NZD/USD

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