Markets Outlook. Jolly Well Working Through. 19 December research.bnz.co.nz Page 1

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1 Markets Outlook 19 December 2016 Jolly Well Working Through Q3 GDP: all aboard for 0.9% (3.7% y/y) Business survey stays strong post quakes. With other Q4 growth pointers looking solid External deficit expected steady around 3% of GDP Nov's credit data to be scoured for LVR impacts Well, so much for winding down ahead of the holidays. Partly because of disruption/delay to the Statistics NZ calendar, there is a cumulated fourteen local items to chop through this week, including Q3 GDP. For Thursday s GDP report we are looking for a quarterly expansion of 0.9%, for annual growth of 3.7%. This is in line with market expectations, and those of the RBNZ (November MPS). That s the technical picture, anyway. Our gut feel is that there s potential for Q3 GDP growth to get to 1.0% or even more. This could conceivably come from a bigger jump in manufacturing than we figure on. We also note that the NZIER s Quarterly Survey of Business Opinion inferred strong activity growth in Q3, while the quarter also experienced relatively fast jobs growth. Still, the bigger issue around GDP is what impact the recent earthquakes will have on Q4/Q1 activity, before the construction response provides a boost further out. In this vein, this afternoon s ANZ business outlook survey, which was conducted during December, essentially stood firm to the recent quakes. This survey is the first to be fully post the shakes. November s survey straddled the main quake of 14 November, so was not a clean read. The own-activity expectations reading for December was Close to Peaking 39.6%, from +37.6%. While a lot of the move was seasonal, it s left consistent with 4% GDP growth, more or less. Net confidence also remained relatively steady, and stout at +21.7%, from +20.5%. These headline results were echoed in the underlying detail around investment, employment, profits, and exports. Re inflation, there was a firming. Pricing intentions, for instance, lifted to +25.6, from +20.8, with construction leading the way at This remains consistent with a pickup in annual CPI inflation in due course. General inflation expectations edged up to 1.60%, from 1.49%. There is a good chance they will keep rising, in our opinion. This is especially with the Q4 CPI likely to register a jump in its annual inflation rate. We are picking 1.4%, from 0.4%. That result is due 19 January. The next ANZ survey is not until later on in February (there is never one conducted in January). But note the next RBNZ quarterly survey of (inflation) expectations is scheduled for 7 February, so just a couple of days before the next RBNZ meeting, the occasion of the 9 February Monetary Policy Statement. Technical note: ANZ published its survey on its website today a couple of minutes before the understood embargo time of 1:00pm. The headlines didn t come across Bloomberg until 1:00pm, however. This might explain any movements in NZD, pre 1:00pm not that it has gone up by that much anyway, since the news of New Zealand s quake-resilient business confidence and outlook went public. Turning % change 7 Gross Domestic Product Annual % 4 Inflation Expectations and CPI Annual % change Annual trend Forecasts 3 Inflation expectations (lhs) BNZ Forecasts Quarter Annual 2 CPI (rhs) Source: BNZ, Statistics NZ Quarterly Source: Statistics NZ, BNZ, ANZ -3 research.bnz.co.nz Page 1

2 Above Average Index NZ Consumer Confidence ANZ-Roy Morgan Westpac McDermott Miller Positive Enough Pre-Quake Annual average % change Building Consents (Values) Non-Residential Residential 70 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Source: Westpac, McDermott Miller, ANZ, Roy Morgan Source: BNZ, Statistics NZ Further news on how the economy is feeling post Q3 has come with other reports this morning. First up was the Westpac McDermott Miller consumer confidence report for Q4. Its main index lifted to 113.1, from back in September/Q3. Some of this is seasonal. Adjusted for this, we judge a level of 112.7, from This tell similar story to what we saw in the ANZ Roy Morgan consumer confidence measure of last Friday. While the ANZ-RM measure tends to run higher than the WMM version, it seems fair to say that they have both nudged a bit above average over recent months. As such, they suggest robust growth in consumer spending, although nothing rampant. This morning s Performance of Services Index was a picture of strength. After looking a little slower a couple of months ago, it re-stretched its legs up to 57.9 in November well above its long term average of Together with last week s Performance of Manufacturing Index 54.4, from 55.1 the PSI suggests GDP growth is running above trend in the December quarter. New Zealand s building consents for October having been delayed a few weeks were published by Statistics NZ this morning. Their new dwelling component increased a seasonally adjusted 2.6%. It wasn t quite enough to stop Solid Index PSI and PMI - Seasonally Adjusted Services (PSI) Manufacturing (PMI) 35 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Source: Business New Zealand, BNZ the trend flattening off, albeit after a strong burst through much of calendar 2016, with those for houses per se drifting down a tad. While Canterbury s were continuing to drift lower, Wellington s new dwelling consents have been on a real tear over recent months. The value of consents for non-residential work, meanwhile, was a solid $526m in October, up 9.7% on a year ago. Yes, annual growth had turned negative in August and September. But this was predominantly because August and September of 2015 were unusually strong (the biggest two months on record, in fact). So the trend in non-residential consents is doing better than the recent annual measures portray. There is still much to drive New Zealand s construction activity higher, including from consequences of the recent quakes. However, we also need to ask how much the sector can reasonably expand from this point, given it already looks as full as a boot, evident in strong ongoing inflation. Staying with the real economy, Wednesday delivers November s International Travel and Migration statistics (10:45am). We d been surprised to see weakness in these. At the same time Statistics NZ will issue its merchandise trade figures for November. While higher dairy prices are beginning to help, we expect the month s goods exports, overall, to be down 2% on a year ago, with imports also down, by 6% y/y. This would give a monthly trade deficit of $585m, so close to market expectations of a $500m deficit. Pluses and minuses from offer-volume tweaks and currency changes are expected to net out to little change to prices at Wednesday s early morning Global Dairy Trade auction. Other price information takes the form of Tuesday s (10:45am) Food Price Index for the month of November, research.bnz.co.nz Page 2

3 for which we anticipate a fall of 0.3%. This is part of the 0.5% lift we expect for the Q4 CPI, which would pop its annual up to 1.4%, from 0.4% (the first result in the 1.0 to 3.0% band in two years). There is also a credit thread to NZ news in the coming week. Wednesday s (3:00pm) new residential lending figures will be more closely scoured for LVR impacts, given they are for November, and for the fact that October s amount was already 8.3% lower than a year prior. The broader, stock of, credit aggregates are due Thursday (3:00pm), which will include information on bank funding, mortgage duration and rural lending. November s credit card billings are scheduled for Wednesday (3:00pm) And, how could we forget the Q3 Balance of Payments, due Thursday (10:45am)? Well, partly because they will be overshadowed by the concurrent release of the Q3 GDP accounts. But also because the external accounts are expected to look relatively well behaved. We anticipate a relatively steady current account deficit of around 3.0% of GDP, in line with the market. That s not too bad for New Zealand. And we forecast it to slim a little over the coming twelve months. This is the last BNZ Markets Outlook of the year. The first one for 2017 is scheduled for 16 January. Between now and then there will be just a handful of monthly data to monitor. These will include the usual batch of housing market reports, for December, with the 13 January electronic card transactions for the month also to note. The first big data report for the New Year, however, is not until the NZIER QSBO (17 January) then the Q4 CPI (19 January). Governor Wheeler s scene-setting speech is due 26 January, while the next RBNZ meeting is the 9 February MPS. craig_ebert@bnz.co.nz research.bnz.co.nz Page 3

4 Global Watch Offshore risk events: Fed Chair Janet Yellen speaks Monday on the labour market. There s also a bevy of US data, including the PCE deflators Thursday. Australia: Monday s mid-year budgets update (MYEFO) and Tuesday s RBA Board Minutes are the main events. Markets are also on alert to any news on Australia s Sovereign credit rating that may follow MYEFO. On the possibilities of a downgrade, please see attached our report: A downgrade for Christmas and Government Crowding Out. China: A sparse calendar with Property Prices on Monday the main interest. US: After Monday s Yellen speech, a quiet calendar until Existing Home Sales on Wednesday, Chicago Fed National Activity Index, Q3 GDP revision, Durable Goods Orders, Initial Jobless Claims, Personal Income/Spending and PCE deflators and Leading Index reports on Thursday, then New Home Sales and revised December UoM Consumer Sentiment on Friday. The US finalises its presidential elections with the Electoral College meeting Monday base case Trump will formally become President-elect. Japan: Ahead of Tuesday s BoJ meeting and Monetary Policy Statement is Trade on Monday, then All Industry Activity Index on Wednesday. Euro: German Ifo Survey on Monday, Current Account on Tuesday, EC Consumer Confidence Wednesday (and for Germany on Friday). UK: Rightmove House Prices Monday, CBI Retail Tuesday, Public Borrowing Wednesday, Consumer Confidence Thursday, then later vintage of Q3 GDP on Friday with Current Account, Index of Services and Business Investment. Canada: Retail Sales and CPI on Thursday (together with new Stats Canada core CPI) the main calendar drawcard. GDP comes on Friday. Chart 1: Budget 16 expenses and receipts projections Chart 2: More Fed tightening now priced in david.degaris@nab.com.au / tapas.strickland@nab.com.au research.bnz.co.nz Page 4

5 Fixed Interest Market Reuters: BNZL, BNZM Bloomberg:BNZ NZ 2-year swap trades at its highest level since early March as the market prices a Nov 2017 RBNZ hike. This is slightly ahead of our core view of a first hike in H But the risks around our view are for a hike sooner rather than later. Our forecasts now see NZ CPI inflation back at the RBNZ s 2% mid-target by mid next year. We suspect the Bank will be relieved to see some inflation after being below the lower end of its band for so long. We therefore see it being in no great hurry to raise rates. But a delay, well into 2018, now seems unlikely. Equally, an early 2017 hike appears premature. NZ 2-year swap should be contained within a % range if the market is constrained by this logic in the months ahead. The risk would be that global momentum pushes yields beyond the level implied by rational analysis of domestic fundamentals. Thursday s Q3 GDP release will be the key event on the domestic agenda this week. We look for 0.9%q/q with upside risk. This is above the consensus forecast of 0.8%. If delivered, it should therefore underpin short-end swaps into the end of the week. Ahead of this, today s ANZ business survey and Wednesday s net migration numbers should also gain attention, as indicators of the durability of growth into Q4. Across the Tasman, this week s focus will be today s MYEFU and tomorrow s RBA minutes. Our NAB colleagues see some prospect of rating agency S&P downgrading Australia s AAA rating soon after the MYEFU. However, they do not anticipate a large market response as the probability of this event has been well telegraphed. However, it will serve as a contrast to the recent NZ HYEFU. This highlighted upside risks to the NZ fiscal outlook and a constrained NZGB issuance schedule. It was quickly followed by reiteration of NZ s sovereign rating by rating agencies. Ahead of tomorrow s RBA minutes, the market prices a first RBA rate hike by mid Yellen s speech early tomorrow morning and the release of the PCE deflator (Thursday) are key US foci this week. Yellen s speech on the labour market, and the Fed s preferred inflation measure, are both relevant to the market s near-term pricing of Fed activity. Currently Fed fund futures price that the Fed will deliver a little more than 100bps of hikes over the coming two years. We see potential for further consolidation in US 10-year yields. Their upward momentum was curtailed at the end of last week, partly due to adverse geopolitical (China/US) headlines. This is a timely reminder that US Treasuries will remain in demand (and yields will dip) during times of risk aversion (bearing in mind our global risk appetite index currently sits at a fairly hearty 69%). We are also mindful that speculative short positions in US 10-year Treasuries are at historic levels, suggesting the market is already well positioned for higher yields. i.e. they are now more vulnerable to negative than positive surprises. Finally, we remain cognisant of US 10-year spreads to key counterparts. US-German 10-year spreads, at 228bps, are at historic wides. The Bank of Japan will also be in the spotlight, as it meets to announce policy on Tuesday. Japanese growth is solid but inflation is still low. Therefore we expect the BoJ to leave its policy unchanged this week. Over time, it may feel the need to raise its target for Japanese 10-year yields from 0%. Yields have risen more than 15bps since early- Nov, in line with the global bond sell-off. They now trade at 0.08%. The BoJ will likely be reticent to buy ever more bonds in order to maintain the 0% target. change (bps) 90 day bills kymberly_martin@bnz.co.nz 12/17 NZGB 04/27 NZGB 2yr swaps 10yr swaps 2yr/10yr swaps (bps) 12-Dec % 1.91% 3.29% 2.32% 3.46% Dec % 1.92% 3.41% 2.41% 3.62% 121 Change (bps) Key Fixed Interest Views Category 19-Dec-16 Tactical (1w) Strategic (6-12m) Comments NZ Money Markets OCR 1.75% We see the RBNZ keeping the OCR at a low of 1.75% throughout NZ Swap Yields 2y 2.43% NZ GDP release this week may support yields. A % range would be consistent with domestic fundamentals. 5y 3.06% Possibility of some consolidation this week after recent surge higher. 10y 3.62% Will take their cue from US-led offshore moves. Some consolidation possible this week. NZ Swap Curve 2s-10s 1.14% We target further steepening to 125bps in the early part of next year. NZ Bond Yields NZGB 2027s 3.41% Some stabilisation of yields into year-end. NZ-AU Swap Spreads 2y 0.46% Widening over the medium-term, as market contemplates next RBNZ hiking cycle while RBA still has potential to cut. NZ Swap-Bond Spread 2027s ASM 0.22% No clear direction for spreads at present. US Bond Yields 10y 2.59% We see potential for consolidation near-term as the momentum in the sell-off fades into year-end. NZ-US Bond Spread NZ-US 2027s 0.82% Currently in the middle of the bps range we expect in the months ahead. NZ-AU Bond Spread NZ-AU 2027s 0.52% We expect widening beyond 60bps in the year ahead. AU MYEFU key risk this week. Source: Bloomberg, BNZ research.bnz.co.nz Page 5

6 Foreign Exchange Markets Reuters pg BNZWFWDS Bloomberg pg BNZ9 Last week the NZD was the weakest of the major currencies we monitor, falling by 2.4% against the USD and 1.4% on a TWI basis. The USD was strong, following the extra rate hike factored into the median FOMC expectation of the Fed Funds rate next year and Chair Yellen indicating that she didn t buy into the argument for allowing inflation to overshoot the 2% target. Arguably, the NZD fell by more than it deserved to. There were no NZ specific reasons that explain the fall, other than milk dairy futures falling a little after a strong run over recent months. Our risk appetite index remained close to a 2-year high. Thus, the NZD looks a little oversold in our view. Our short-term model estimate closed last week at , taking the gap between spot and fair value to its largest in over a year. Unless you believe that risk appetite is about to fall a lot, then buying the dip looks like a good short term trade, although we maintain our view that the pressure will be towards the downside next year. There s a lot of local economic data to digest this week, much of it second-tier. The focus will be Thursday s Q3 GDP release where the market is at 0.8% q/q, BNZ is at 0.9% and the figure could well have a 1% handle. It s another reminder of the underlying economic strength in NZ. Overlay stronger terms of trade and nominal GDP growth is well on its way to reaching 8% (not a typo) sometime next year. This argues for a relatively strong NZD. Early tomorrow morning, the latest GDT dairy auction takes place, which should see dairy prices take a breather after their recent strong run. Today s Australian fiscal update will be closely watched. Rating agencies will be running a comb through the numbers to see whether they can justify a downgrade from the current AAA level. The AUD could dip on a rating downgrade, but history shows that these sorts of market reactions don t last for long. RBA minutes from the December meeting shouldn t surprise with its neutral undertones. In the US there s also plenty of data, but we ll be focused on the personal income and spending release on Friday morning which also sees the core PCE deflator released. Another nudge up in the yoy% increase in that deflator to 1.8% puts inflation ever closer to the Fed s 2% target. It all adds to the strong case for a lot more Fed tightening next year, especially when easier fiscal policy is overlaid. We continue to have strong conviction on the stronger USD theme for Elsewhere, the BoJ s meeting tomorrow will be interesting to see if the central bank is prepared to lift its yield curve targets. In a rising global bond yield environment, the 0% target for the 10-year JGB has been remarkably successful in driving the yen weaker. We doubt the BoJ is willing to back down on that policy at this juncture. It all adds up to a soft yen environment and a strong link between the yen and global bond rates. We see NZD/JPY tracking in the low 80s over coming months. NZD Short-term Over-sold on Our Model 10 NZD/USD Model Residual (%) 8 6 NZD overbought NZD oversold -10 Latest Source: BNZ Yen Fortunes Closely Linked to US Treasuries This Year NZD/JPY vs US10-year rate US 10-year rate (lhs) NZD/JPY (rhs) Jan-16 Apr-16 Jul-16 Oct-16 Source: BNZ, Bloomberg Cross Rates and Model Estimates jason.k.wong@bnz.co.nz Current 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 % research.bnz.co.nz Page 6

7 Technicals NZD/USD Outlook: Downward bias to range ST Resistance: (ahead of ) ST Support: (ahead of ) The NZD broke through July s support levels last week, but only just and has since recovered a touch. The level is thus the new support level, ahead of deeper support at The first area of resistance is now well above spot at around NZD/USD Daily Source: Bloomberg NZD/AUD Outlook: Trading range ST Resistance: (ahead of ) ST Support: (ahead of ) The currency has spent much of the past 6 months oscilliating in a range and the current spot is close to the top of that range, which is an area of strong resistance. The first area of support is around NZD/AUD Daily Source: Bloomberg jason.k.wong@bnz.co.nz NZ 5-year Swap Rate Outlook: Higher ST Resistance: 3.29 ST Support: 2.78 Market is trending higher and keep borrowed position until technical indicators turn down. Support at 2.78 now and keep this trendline as a trailing stop. NZ 5-yr Swap Daily Source: Bloomberg NZ 2-year - 5-year Swap Spread (yield curve) Outlook: Steeper ST Resistance: +88 ST Support: +43 We never saw the anticipated pullback and now +63 has been breached. Look for a move to +88. NZ 2yr 5yrSwap Spread Daily Source: Bloomberg pete_mason@bnz.co.nz research.bnz.co.nz Page 7

8 Key Upcoming Events Forecast Median Last Forecast Median Last Monday 19 December NZ, WMM Consumer Confidence, Q NZ, ANZ Business Survey, December NZ, BNZ PSI (Services), November 56.3 NZ, Building Consents, October (res, #) +0.2% Aus, Government's MYEFO China, Property Prices, November Jpn, Merchandise Trade Balance, November +Y Y496b Euro, Labour Costs, Q3 y/y +1.0% Germ, IFO Index, December US, Markit PSI, December 1st est US, Yellen Speaks Tuesday 20 December NZ, Food Price Index, November -0.3% -0.6% Aus, RBA Minutes, 6 December Meeting China, Leading Index (Conference Bd), November +0.8% Jpn, BOJ Policy Announcement, Target +Y80T p.a. +Y80Tp.a. Germ, PPI, November y/y -0.4% UK, CBI Retailing Reported Sales, December Wednesday 21 December NZ, Credit Card Billings, November +2.8% NZ, External Migration, November s.a. +6,240 NZ, Dairy Auction +3.5% Wednesday 21 December continued NZ, Merchandise Trade, November -$585m -$500m -$846m NZ, Residential Lending, November y/y -8.3% Aus, Westpac Leading Index, November +0.06% Jpn, All Industry Index, October +0.1% +0.2% Euro, Consumer Confidence, December 1st est US, Existing Home Sales, November 5.50m 5.60m Thursday 22 December NZ, Household Credit, November y/y +8.7% NZ, Balance of Payments, Q3-3.0% -3.0% -2.9% NZ, GDP, Q3 +0.9% +0.9% +0.9% Euro, ECB Economic Bulletin US, Jobless Claims, week ended 17/12 259k 254k US, Durables Orders, November 1st est -4.5% +4.6% US, Personal Spending, November +0.3% +0.3% US, Leading Indicator, November +0.2% +0.1% US, Chicago Fed Nat Activity Index, November -0.15% US, GDP, Q3 3rd est +3.3% +3.2%P Friday 23 December UK, GDP, Q3 3rd est +0.5% +0.5%P US, Mich Cons Confidence, December 2nd est P US, New Home Sales, November 575k 563k 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 12/ / / / / / / / 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 New Zealand Dollar TWI NZD/USD F/casts NZD TWI NZD/USD (RHS) Source: BNZ, RBNZ research.bnz.co.nz Page 8

9 Contact Details Stephen Toplis Head of Research +(64 4) Craig Ebert Senior Economist +(64 4) Doug Steel Senior Economist +(64 4) Kymberly Martin Senior Market Strategist +(64 4) Jason Wong Currency Strategist +(64 4) Main Offices Wellington 60 Waterloo Quay Private Bag Wellington Mail Centre Lower Hutt 5045 New Zealand Phone: +(64 4) FI: 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 Global Head of Research +(61 2) Alan Oster Group Chief Economist +(61 3) Ray Attrill Global Co-Head of FX Strategy +(61 2) Skye Masters Head of Interest Rate 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. research.bnz.co.nz Page 9