Buddy, Can You Spare A Quarter?

Transcription

1 Buddy, Can You Spare A Quarter? A reluctant hiking bias, still, at Thursday s MPS? We retain March-hike view and hawkish tilt We judge Q1 manufacturing output up 1.1% Trimming GDP growth pick to 0.6%, from 0.7% May s Paymark data keep our ECT view at 0.5% Friday s PMI, FPI, complete the data week Annual % change Gross Domestic Product Forecasts BNZ RBNZ We know the Reserve Bank, in setting its Official Cash Rate (OCR), is portraying a grand trade-off between a high exchange rate and a housing bubble. But step back a bit, from this supposed conundrum, for just a moment, and you will see, we re concluding a three-month stretch, which, by way of its economic news, has exerted as much upward pressure on the OCR outlook as any quarter we can remember. Sure, global risks still swirl. But, since the March Monetary Policy Statement (MPS), we ve seen; NZ GDP picking up a real head of steam (by way of Q4 GDP and the various economic confidence surveys) Surging construction, with a sharply increased government estimate of the total cost of rebuilding Canterbury (to $40b, from $30b) Strong house price inflation (with today s QVNZ annual measure, for instance, at 7.1% y/y), establishing greater degrees of over-valuation to economic fundamentals, across the majority of the country Unemployment having plunged to a 3-year low in the March quarter Mortgage rates making fresh 50-year nadirs, aided by reducing funding premiums in international markets Disappearing drought, on an amazing run of warm rainy weather over March, April and May A weakening currency (with the near 8% fall in the TWI since a mid-march peak, putting it almost 3% south of where the March MPS thought it would be) We put it that all of these things, individually, have meant a boost for the economy more than the RBNZ was figuring on and collectively heaps so. And thus more pressure on the inflation outlook (albeit with the very near-term CPI picture appearing about as slow as the March MPS presumed). Yet it looks very much like the Reserve Bank will keep is tightening bias very much apologetic in nature, at Thursday s Monetary Policy Statement, rather like it had Source: RBNZ, Statistics New Zealand, BNZ Quarterly in its March Statement. So, amid a lot of hand wringing, and arm waving, OCR hikes not underway much before mid-2014, at the earliest. At least this is the impression we got from Graeme Wheeler s speech of 30 May. And from the way the markets reacted to it. Having been sniffing the chances of a December hike, pre-speech, they are currently pricing not much more than 25 basis points of tightening over the coming twelve months (and a 3.25% OCR by mid-2015). Be this as it may, we still think New Zealand s general, macro-economic, story will be solid enough to force the Bank to start reducing its OCR stimulus around March. It would probably be earlier if the RBNZ didn t sound so reluctant. It could be earlier, still, if New Zealand s general economic data continue to barrel along in the manner they have to date. Timing aside, we most of the OCR going much higher than the market reckons, with our level 4.50% by mid Regards recent economic performance, March quarter manufacturing was not as bad as this morning s headline statistics suggested. While sales volumes were down a seasonally adjusted 0.6%, there were offsets by way of inventories. And so, after plugging in our separatelyestimated food processing numbers (capturing the drought), we judge a 1.1% increase in manufacturing production for the purposes of the Q1 GDP accounts. The bad news is that 1.1% is shy of the 1.5% bounceback we had hoped for, which tips our Q1 GDP growth estimate down to 0.6%, from 0.7%. We ll make this shift formally today and see how we go with the remaining GDP indicators. In the end, a 0.6% expansion following Q4 s 1.5% would be a solid result (and especially so in a global context).

2 Quarterly % change 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Manufacturing Activity Production indicator derived from manufacturing survey Manufacturing Production GDP -10% Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Source: Statistics NZ, BNZ Quarterly Manufacturing Sales Volumes Annual % change Target peak Target low Source: RBNZ, Statistics NZ, BNZ Consumer Price Index Quarterly GST hike Forecasts BNZ RBNZ Mar MPS As for Wednesday s electronic card transactions for the month of May, we continue to expect a 0.5% advance in these, in total. This morning s Paymark data did nothing to dissuade us of this view. This all keeps us of the mind personal spending volumes are ticking along nicely and will increase a solid 0.7% or so in Q2. For Friday s Performance of Manufacturing Index, published 10:30am, we are looking for another robust monthly result, following the 54.5 level it struck in April. There is still much to support New Zealand s manufacturing (even though NZD/AUD is fast losing its cheapness and Australia s economic momentum is slowing). 0.3% increment in the Q2 CPI (for 0.8% annually). We have bumped up our estimate of Q3 inflation, however, to 0.7%, after the recent rebound in fuel prices. This would deliver annual inflation of 1.2%, a few notches higher than the March MPS s expected 0.9%. This, in turn, is a direct reminder of the material decline in the exchange rate we ve seen of late. Then there s all the momentum in the real economic data, and house prices, to think about. It s been a very strong run of data these three months since the March Monetary Policy Statement. For Thursday s MPS we might ask of the Reserve Bank can you spare us a quarter? But we suspect we ll get the bum s rush. Friday s 10:45am Food Price Index, we venture, increased 0.5% for May. Such a result would maintain our view of a % Day Bank Bills Diffusion Index, seas. adj PMI Momentum Orders Degree of expansion Forecasts BNZ Breakeven Overall Degree of contraction Mar RBNZ MPS Source: RBNZ, BNZ Quarterly Average Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: BNZ/Business NZ Monthly craig_ebert@bnz.co.nz

3 Fixed Interest Market Reuters pgs BNZL BNZM Bloomberg pg BNZ BNZ NZ short-end swaps continue to trade in familiar ranges, approaching this week s RBNZ meeting. NZ 2-year swaps currently trade around 2.98%, and the market now prices around 32bps of rate hikes from the RBNZ in the coming 12 months. We continue to expect a first 25bps hike from the RBNZ in March next year, with the OCR 50bps higher by this time next year. However, market pricing seems reasonable for now. The RBNZ s recent commentary has suggested it would rather err on the side of leaving rates lower for longer, than risk exacerbating NZD strength. With the NZD TWI having fallen 7.6% since early April, the RBNZ may now be feeling a little more comfortable with the state of the currency. However, we do not think it will notably change its tone this week or its 90-day bank bill track. This currently implies a first OCR hike in early H We continue to believe the market under-estimates the pace of OCR normalisation over the next few years however. We see the OCR peaking at 4.50% in mid Market swap rates are currently consistent with an OCR at less than 3.50% by this time. This is lower than forecasts from either the NZ Treasury or the RBNZ. Consequently, hedging against interest rate rises over a 3-5-year time frame still appears attractive at current swap rates, in our view. This is despite the 30bp rise in mid-curve swap yields from their early May dip. We see further widening for NZ-AU swap spreads. Across the Tasman, AU short-end yields have dipped to all-time lows. 2-year swap closed last week at 2.69% as the market prices a further 25-50bps of rate cuts from the RBA in the year ahead. Our NAB colleagues continue to expect a further 25bps rate cut from the RBA by yearend. NZ-AU swap spreads, currently at 27bps, are at their highest level since April However, we see spreads moving above 50bps by early next year, as the RBNZ ultimately raises its cash rate above the RBA s. Friday s much anticipated US employment report provided some mixed signals. However, overall it probably did little to dissuade the market of the view that the US Federal Reserve is steadily progressing toward tapering QE later this year. After some initial pronounced volatility, US 10- year yields rose to end the week at 2.17%. For now, we continue to see US 10-year yields in a range marked by highs on yield in the vicinity of 2.25%. By year-end however, we see yields at 2.50%. Friday s BNZ PMI for May will be the domestic data highlight, aside from this Thursday s RBNZ meeting. We would look for the PMI release to tell a similar story as recent readings i.e of a manufacturing broadly expanding but with sectoral idiosyncrasies. Tomorrow s NAB business confidence survey and Thursday s employment report are the key data points likely to influence the market s rate view across the Tasman. Consensus is looking for a further tick-up in the AU unemployment rate. Our NAB colleagues see a tick-up from 5.5% to 5.7% in May, a new high for this cycle. Such an outcome would likely confirm current market expectations for further RBA cuts. This week s global data are less significant than last week s US payrolls. However, end of week US data (retail sales, industrial production and University of Michigan consumer confidence) should provide a broad view of the state of the US economic recovery. After the move higher in US 10-year yields at the end of last week, we would now look for some consolidation below the 2.25% level. change (bps) 90 day bills 04/15 NZGB 04/23 NZGB 2yr swaps s/a 10yr swaps s/a 2yr/10yr swaps(bps) 31-May % 2.57% 3.58% 2.95% 4.06% Jun % 2.54% 3.55% 2.92% 4.02% 110 Change (bps) kymberly_martin@bnz.co.nz Key Fixed Interest Views kymberly_martin@bnz.co.nz Category 4-Jun-13 Tactical (1w-1m) Strategic (12mth) Comments NZ Money Markets OCR 2.50% The market prices 32bps of OCR hikes in the year ahead. We see the OCR 50bps higher by this time next year, after a first hike in March. NZ Swap Yields 2-year 2.96% RBNZ's recent tone fairly dovish suggesting % window will likely cap yields for now 5-year 3.50% Our core stragegic view is for higher lows and higher highs on yields. For now, there are few domestic catalysts to drive yields higher. 10-year 4.07% Upward momentum in long yields has dissipated for now, though US long yields remain key. NZ Swap Curve 2s-10s 111bps We see the curve contained within the well-established bps range for now. We see the curve at 60bps by this time next year. NZ Bond Yields NZGB 23s 3.55% A period of consolidation in yields is likely due, although over medium-term a continued sell-off from 'expensive' territory is expected. NZ Swap-Bond Spread 10-year 50bps May highs (around 66bps) mark the peak for now. We see a range between around 35-60bps as being justified over the medium-term. US Bond Yields 10-year 2.17% We now see yield trading in a higher % range. Data releases to drive volatility. NZ-US Bond Spread NZ-US23s 154bps Assuming US long yields consolidate we see potential for spreads to widen back above 180bps. NZ-AU Bond Spread NZ-AU23s 29bps Spreads have widened above our exit target of 25bps. Some consoldiation around these levels is now likely. NZ Credit Spreads Financials Expect some consolidation after offshore widening of spreads over the past fortnight. Non-Fin As above.

4 Foreign Exchange Market Reuters pg BNZWFWDS Bloomberg pg BNZ9 Last week s US payrolls report proved sufficient for the NZD/USD to break below key support around The report provided something for everyone, with mixed messages in the detail. However, overall, the report did not derail the market s view that the US Fed is steadily progressing toward tapering QE later this year, as the US economy gradually heals. Negative momentum in the NZD and its trans-tasman cousin remains. The weekend s disappointing Chinese trade data did little to improve sentiment toward the AUD. However, we would caution against now extrapolating currency weakness too far. The most recent IMM speculative positioning data show AUD net short positioning extended to an historical extreme as of last Tuesday, at -58.6k contracts. Also, speculative net long positions in the NZD have plummeted. Such moves often portend a subsequent rebound in the currency. That said, we have recently revised our year-end NZD/USD forecast lower from to Our key premise that the NZD remains well supported by domestic fundamentals (growth and interest rate differentials and NZ commodity prices) remains intact. However, as the market has inched forward its expectations for the tapering of US QE, demand for the risk sensitive NZD has been reduced. In addition, the prospect of greater currency volatility reduces the appeal of carry trade currencies such as the NZD. Near-term we would be looking for a NZD/USD bounce. Crucial support this week is eyed at the level. In recent weeks, movements in the NZD have been largely a by-product of global sentiment toward US monetary policy and risk appetite generally. This week, some focus may return to domestic developments with the meeting of the RBNZ on Thursday. It will likely reiterate its mediumterm tightening bias. Its attitude toward the NZD will be closely watched, given its previous discomfort with the overvalued NZD, which has now declined more than 7% on a TWI basis since April. We have also recently revised higher our NZD/AUD forecasts. We now see the NZD/AUD at at year-end ( previously). Trans-Tasman data delivery continues to mostly highlight diverging trends. The NZ economy is shown to be broadly on a solid footing while the AU economy still faces risks as mining sector investment peaks, and other areas of its economy remain lacklustre. Correspondingly we see a further rate cut from the RBA this year, as we approach RBNZ rate hikes. In 2014, we see the RBNZ cash rate moving above the RBA s. This week, aside from the RBNZ meeting, the key determinant of the NZD/AUD cross will likely be Thursday s AU employment report. Our NAB colleagues see a tick-up in the AU unemployment rate in May from 5.5% to 5.7%, a new cyclical high. Such an outcome could see the move NZD/AUD higher. This is especially so, as the data is scheduled for the same day that the RBNZ will likely outline the NZ economy is on a steady footing with an unemployment rate expected to gradually shift lower. As a consequence of downward revisions to our NZD/USD and upward revisions to our NZD/AUD forecasts our outlook for the NZ TWI to be higher than current at yearend remains intact. A gradual decline is seen taking hold next year. kymberly_martin@bnz.co.nz

5 Technicals NZD/USD Outlook: Sell in a lower range now ST Resistance: (ahead of ) ST Support: (ahead of ) The commodity currency pairs continue their move lower and the breach of seemingly a very key break for Kiwi. Certainly the longer term types view this break as very bearish. For now the level should cap a rally. NZD/USD Daily NZD/AUD Outlook: Range trade healthy pullback ST Resistance: (ahead of ) ST Support: (ahead of ) In many ways the NZDAUD took a backseat to the bigger moves against the USD, last week. That said, the pullback should be limited to the area. tyler_cory@bnz.co.nz NZD/AUD Daily NZ 5-year Swap Rate Outlook: Higher ST Resistance: 3.65% ST Support: 3.29% The market consolidated last week. Still expect a move to 3.65 resistance. Support has moved up on trendline to NZ 5-yr Swap Daily NZ 2-year - 5-year Swap Spread (yield curve) Outlook: Steeper MT Resistance: +61 MT Support: +44 Still expect a move to +61 en route +68. NZ 2yr 5yrSwap Spread Daily pete_mason@bnz.co.nz

6 Key Upcoming Events Forecast Median Last Forecast Median Last Monday 10 June NZ, Manufacturing Sales, Q1 vol s.a. +1.5% NZ, (circa) REINZ Housing Data, May NZ, QVNZ House Prices, May +7.1% Aus, Holiday, Queen's Birthday Jpn, Trade Balance (BOP basis), April - 730b - 220b Jpn, GDP, Q1 2nd est +0.9% +0.9%P Jpn, Eco Watchers Survey (outlook), May Tuesday 11 June Aus, Housing Finance, April +2.5% +2.0% +5.2% Aus, NAB Business Survey, May China, Manpower Survey, Q3 +18% Jpn, MOF Business Survey, Q Jpn, BOJ Policy Announcement 0.10% 0.10% 0.10% UK, Industrial Production, April flat +0.7% US, Wholesale Inventories, April +0.2% +0.4% Wednesday 12 June NZ, Electronic Card Transactions, May +0.5% +0.5% +1.1% Aus, Consumer Sentiment - Wpac, June 97.6 Jpn, BOJ Monthly Report Jpn, Machinery Orders, April -8.1% +14.2% Wednesday 12 June continued Euro, Industrial Production, April flat +1.0% Germ, CPI, May y/y 2nd est +1.5% +1.5%P UK, Unemployment Rate (ILO), April 7.8% 7.8% Thursday 13 June NZ, Monetary Policy Statement 2.50% 2.50% 2.50% Aus, Unemployment Rate, May 5.7% 5.7% 5.5% Aus, Employment, May -30k -10k +50k Euro, ECB Monthly Bulletin US, Jobless Claims, week ended 08/06 345k 346k US, Business Inventories, April +0.3% flat US, Retail Sales, May +0.4% +0.1% Friday 14 June NZ, BNZ PMI (Manufacturing), May 54.5 NZ, Food Price Index, May +0.5% +0.2% Jpn, BOJ Minutes, 21/22 May Meeting Euro, CPI, May y/y 2nd est +1.4% +1.4%P US, Mich Cons Confidence, June 1st est US, PPI ex-food/energy, May y/y +1.7% +1.7% US, Industrial Production, May +0.2% -0.5% US, Current Account, Q1 s.a. -$111.0b -$110.4b 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 NZD/USD F/cast

7 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 60 Waterloo Quay Private Bag Wellington Mail Centre Lower Hutt 5045 New Zealand Phone: +(64 4) FI: Fax: +(64 4) Auckland 80 Queen Street Private Bag Auckland 1142 New Zealand Phone: +(64 9) Toll Free: Christchurch 81 Riccarton Road PO Box 1461 Christchurch 8022 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 20) Fixed Income/Derivatives +(44 20) 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.