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Boringly Brilliant 2
Australian Q3 GDP Analysis 5
Carbon and Commodities 8
NZD vs. Long-Term Fair Value Estimates 9
FX Momentum Model 12
The BNZ OIS-ter: Reaching For the Light 13
Interest Rate Strategy: The Big Break 14
NZ Economic Review 16
NZ Upcoming Data/Events 18
Quarterly Forecasts 20
Forecasts 21
Calendar 22
Contact Details 23
Economic Outlook
Today’s Half Year Economic and Fiscal Update yet again
showcased the enviable fiscal position that New Zealand has
attained – on the back of astute fiscal management and a swiftly
growing economy. Despite stumping up to fund another
earthquake recovery, the Government is forecasting its third
consecutive fiscal surplus this financial year (albeit it small at
0.2% of GDP) and progressively bigger surpluses up to 2.7% by
2020/21. Net debt is seen having peaked at 25.5% of GDP and
forecast to decline to 18.8% by 2021. These Treasury forecasts
are based on an economic growth outlook a bit rosier than we
currently project. So the Government may not have quite as
much to play with as it currently believes, although we may need
to reassess our own growth projections in light of the increased
Government investment profile announced today. But really, it is
shades around a positive economic outlook. We will reassess our
forecasts in light of the Q3 GDP figures due just before
Christmas, where we still sense a bit more downside risk than
upside to our current +0.8% estimate.
Interest Rate Outlook and Strategy
Markets are increasingly focused on pricing the next RBNZ hiking
cycle. We anticipate a first hike in H1 2018. Consistent with this,
we see near-term resistance to NZ 2-year swap breaking above
2.35%. Fundamentally, that level would be consistent with the
market pricing OCR hikes from early in H2 next year. We believe
that is probably premature, though we believe the risks are now
tilted toward an earlier than later start to the hiking cycle. At the
long-end of the curve, we expect higher NZ yields next year,
aligned to expected moves in US yields, though some near-term
consolidation is likely. We also anticipate further NZ curve
steepening. Strategically, we anticipate wider NZ-AU short-end
spreads as we see the NZ cash rate cycle as further advanced
than Australia’s. Finally, we are watching LGFA-NZGB long-end
spreads to position for compression.
Currency Outlook
On a TWI basis, the NZD has traded above our long-term fair
value estimate for much of the past 12 years, supported by NZ’s
strong terms of trade. The current level of the TWI is about 7%
above our long-term FV estimate, which is actually below the
average “valuation” gap of the past 12 years. There are large
divergences on the crosses, with the NZD well above long-term
FV against EUR, GBP, JPY and CAD. The NZD is below FV
against CNY, while only slightly above against USD and AUD. Our
projections suggest more of the same, with little in the way of
the closing of the gap with long-term FV over the coming year on
most of the crosses.
Contents
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5
10
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20
25
30
35
40
45
50
55
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
% of GDP
Fiscal Years
Core Fiscal Balance and Net Debt
Operating balance (lhs)
Net debt (rhs)
% of GDP
* Operating balance before accounting and revaluation changes Source: Treasury, BNZ
HYEFU 2016
Forecasts
HYEFU 2016 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021actual actual actual actual f/cast f/cast f/cast f/cast f/cast f/cast
(June years, % of GDP)
Core Crown Revenue 28.1 29.2 28.5 29.9 30.2 30.4 30.1 30.1 30.3 30.6
Core Crown Expenses 32.0 32.0 30.3 30.0 29.4 29.6 28.7 28.1 27.9 27.7
OBEGAL -4.3 -2.0 -1.2 0.2 0.7 0.2 1.2 1.8 2.2 2.7
Gross Sovereign Issued Debt (excl settlement cash) 39.1 38.5 37.6 38.6 37.1 36.8 33.9 30.6 28.8 25.9
Net Core Crown Debt 23.5 25.5 25.5 25.1 24.6 24.3 23.8 22.2 20.3 18.8
Domestic Bond Programme ($NZm) 15,000 14,000 8,000 8,000 8,000 8000 7000 7000 6000 6000
(June years)
Real GDP (annual average % change) 2.8 2.3 3.0 3.3 2.8 3.6 3.5 2.9 2.4 2.3
Consumer Price Index (annual % change) 1.0 0.7 1.6 0.4 0.4 1.5 2.0 2.1 2.0 2.1
Unemployment rate (June qtr) 6.3 6.0 5.2 5.5 5.0 4.8 4.6 4.2 4.3 4.3
90-day Bank Bill Yield (March qtr. av.) 2.6 2.6 3.4 3.5 2.4 1.9 1.9 2.3 3.2 3.9
Trade Weighted Index (March qtr. av.) 72.4 76.3 81.5 76.2 73.5 76.5 74.9 75.0 74.5 72.6
Government surpluses abound
Despite another debilitating earthquake
Net Government bond issuance to turn negative
Governor Wheeler delivers optimistic message too
A great time for a new PM to take the reins
Today’s Half Year Economic and Fiscal Update (HYEFU)
yet again showcased the enviable fiscal position that New
Zealand has attained. Few governments in the world will
be spending their time losing sleep over what to do with
burgeoning surpluses. Yet this is where New Zealand’s
Minister of Finance (soon to be Prime Minister), Bill
English, finds himself. Much of this is due to astute fiscal
management, the rest to an economy whose population-
driven strength continues to surprise.
Despite stumping up to fund another earthquake recovery,
the Government is forecasting a Crown operating surplus
of 0.2% of GDP in the 2016/17 fiscal year - its third
consecutive surplus. More importantly, that surplus is
forecast to rise progressively to reach 2.7% of GDP by
June 2021. Consequently, net core crown debt is seen as
having peaked at 25.5% of GDP and is now headed to
18.8% by forecast end.
If Treasury’s forecasts prove accurate then there will be
plenty of room to ease fiscal policy later on down the
track either by way of increasing expenditure or reducing
taxes. Already the Government allows for $1.5 billion of
unallocated expenditure growth per annum largely for the
funding of the needs of a growing population. History
suggests that if this Government gets its way it will lean
towards tax reduction (or family support increases) as its
preferred fiscal easing.
Growing Surpluses
Growth forecasts questionable . . .
That said, there are probably some question marks over
the economy’s ability to grow at the pace Treasury
assumes. Treasury is forecasting GDP growth of 3.5% for
the year ended June 2018, 3.0% in 2019, 2.4% in 2020
and 2.3% in 2021. In contrast, our respective forecasts are
2.8%, 2.1%, 1.7% and 1.7%. If we are right then the
Government will have less to play with than it currently
believes.
Be that as it may, the Finance Minister was today very
quick to point out that he was not going to be at all hasty
in making promises. In line with this, the unallocated
future allowances for spending have remained unchanged
from those announced in the Budget. Accordingly, there is
no threat to current policy if, indeed, revenues prove less
than anticipated. Moreover, we are the first to admit that
we have tended to underestimate the pace of this
expansion and may still be doing so.
Boringly Brilliant
Growth Expectations Optimistic
In particular, we may need to reassess our investment
forecasts given that Treasury today announced that the
Government would be spending $2.1 billion more on
capex in the year ahead than previously expected and that
the following years’ allocations have been lifted from a
$900 million per annum increase to $2.0 billion.
Bonds Drying Up
Bond tender programme . . . .
Importantly, the Government has been able to achieve this
without increasing its borrowing programme but, instead,
utilising its revenue windfall. Accordingly, the total bond
tender programme for the period ended June 2020 is
unchanged from the Budget. This results in Gross Bond
issuance of $8.0 billion in 2016/17, $7.0 billion in each of
the next two years and then $6.0 billion in each of the two
years thereafter. The cumulative gross issuance for the
five years ended June 2021 is forecast to be $34.0 billion.
At face value that might appear liquidity enhancing but the
repayment of market bonds over the same period is $41.2
billion delivering net issuance of -$7.2 billion.
The net reduction in supply, coupled with what will
undoubtedly be a positive response from rating agencies,
should (at least in theory) help keep a lid (relatively
speaking) on New Zealand bonds as longer dated paper
around the world pushes generally higher in yield.
Additionally, it is worth noting than an increasing
proportion of bonds on issue will be index-linked.
The Debt Management Office has said that inflation-
indexed bonds will account for $2.5 billion of the $8.0
billion 2016/17 bond programme with a new 2040
inflation-indexed bond to be launched via syndication.
Minimal Stimulus
Monetary policy implications minimal . . .
From a monetary policy perspective, there is little in the
HYEFU to get excited about. At the margin, the increase in
Government capital spending will put further pressure on
an already capacity-constrained sector. This in turn will put
upward pressure on inflation. Apart from this, though,
there is no indication of any more fiscal stimulus than
already promulgated in previous Budgets. And while, on
balance, fiscal positioning provides modestly more up-
front stimulus than previously estimated, it remains
broadly contractionary over the forecast horizon.
From a forecasting perspective, Treasury sees CPI
inflation quickly moving to the mid-point of the target
band and staying there for the foreseeable future. This
results in the 90 day bank bill rate sitting at 1.9% right out
to the June quarter 2018 but then rising steadily to 3.9%
by June 2021.
Governor Wheeler upbeat . . .
Today’s fiscal announcement was never likely to be
market moving and so it proved to be the case. In
contrast, Governor Wheeler’s 9.00am speech created
more interest with the Kiwi dollar moving around 50 basis
points higher over the day on a TWI basis as we, and the
market, interpreted his words as being modestly hawkish.
While Wheeler categorically stated that the Bank’s views
had not changed from those espoused in the November
Monetary Policy Statement, it did appear, nonetheless,
that he was seeing less risk of a further easing than had
been previously intimated. His comments didn’t change
our view that rates are on hold until mid-2018 but the
balance of risk around future interest rate hikes is certainly
shifting toward earlier rather than later.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2016 2017 2018 2019 2020 2021
Annual average% change
June Years
GDP Growth Forecasts
Treasury
BNZ
Source: Treasury, BNZ
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
% of GDP
June Years
Bond Issuance
Net Gross
Source: Treasury, BNZ
Forecasts
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2003/04 2005/06 2007/08 2009/10 2011/12 2013/14 2015/16 2017/18 2019/20
Estimated Fiscal Impulse
Budget 2016
HYEFU 2016
June YearsSource: NZ Treasury, BNZ
% of GDP
Net expansionary
Net contractionary
Forecasts
Prime Minister English . . .
Short term market attention now turns back to the
domestic political environment. However, the changes
afoot seem well telegraphed. Bill English should be
confirmed as the new Prime Minister on Monday with
Steven Joyce then appointed as his Finance Minister. The
new Deputy Prime Minister seems less of a given though
Paula Bennet is seen as the front-runner. Whatever the
line-up, the incoming cabinet will then be able to have the
rare luxury of debating just what to do with an economy
that is firing on most cylinders, producing an expansion
that the RBNZ sees no need to bring to an end, and
generating plenty of cash for its leaders to play with.
0.5% fall in Q3 GDP not as weak as it appears
Still, there are signs of real slowing
Albeit with terms of trade rebound now offering
support
NAB still sees RBA cutting by mid-2017
Australia’s National Accounts saw real GDP growth come
in well below market expectations at -0.5 % q/q, with year-
ended growth dropping to just 1.8% – below growth
potential. This is the first contraction in GDP since Q1
2011 and highlights the lingering risks to the growth
outlook. Growth is forecast to remain well below 3% in
the medium term.
While the slowdown was relatively broad-based, our
assessment is that the headline figure is probably
overstating magnitude of the decline in the economy.
Indeed, we do not anticipate another negative print in the
December quarter - our early forecast is approximately
0.9% q/q, as a few one offs (such as weather disruptions
affecting dwelling and non-dwelling construction, and the
unwinding of strong public investment in Q2), although
year-ended growth still only picks up to 2% y/y. That said,
softness in key categories such as household
consumption and non-mining business investment, as
well as in Victoria and NSW are troubling.
Thursday’s figures, in conjunction with slowing
employment and weaker business conditions, raise the
possibility that the non-mining recovery has
run out of steam earlier than expected. We remain
comfortable with our view that the RBA will need
to cut rates further in 2017 (see below for further detail).
The weakness in GDP growth was relatively broad based
in the quarter, with investment, public spending and trade
all contracting. Dwelling investment saw a surprise
decline in the quarter (1.4%), largely related to weather
disruptions, although the extremely elevated construction
pipeline suggests an increase in activity going forward.
Household consumption was the only expenditure
component to show positive, albeit fairly modest, growth
at 0.4% q/q. Nevertheless, indications going forward look
somewhat mixed. Retail sales data has improved in recent
months, but the NAB Business Survey has shown a clear
deterioration in business conditions for retailers of late. As
expected, mining investment contracted again in the
quarter (as evidenced by another fall in engineering
construction), with further declines still likely in coming
quarters. Resource exports failed to provide an offset –
despite the recent strength in prices – with net exports
contracting 0.2 ppts from GDP. Non-mining private
investment was a little more upbeat than expected, but
that is not a trend that extends into investment plans for
the year ahead. Public investment also declined, following
strong growth last quarter, although given the large
infrastructure initiatives underway, this component is likely
to remain ‘lumpy’.
The recovery in the non-mining economy has become
much less pronounced, although the services sector still
appears to be performing reasonably well – our estimates
of non-mining GDP decreased by 0.2% in the quarter and
year-ended growth eased to 2.6%. The agricultural sector
was a clear standout in the quarter, consistent with a
bumper grain harvest. Elsewhere outcomes were
generally soft. In particular, construction subtracted 0.3
ppts from GDP growth in the quarter. Some services
continue to outperform. Finance & insurance, health and
education meanwhile have enjoyed consecutive quarters
of positive growth.
State final demand (SFD) was soft across most states,
with the weakness most pronounced in WA – driven by
big declines in investment (both private and public).
Tasmania and the ACT also saw declines in SFD, but
Victoria’s decline was the most surprising – driven by a big
contraction in public spending. NSW SFD growth also
slowed noticeably to 0.1%, in line with softening
employment and business conditions in the state.
Queensland meanwhile encouraging signs of pickup in
household consumption and private investment, although
SFD was weak at 0.1% q/q.
The terms of trade rose by 4.5% in Q3, and added to
income growth – following a prolonged period of decline.
However, the sustainability of recent rallies in commodity
prices remains questionable. Nevertheless, the temporary
support saw real gross domestic income rising 0.4% q/q
and real net national disposable income per capita rising
0.5% q/q. Nominal GDP saw similar growth at 0.5% q/q
and 3% y/y.
Labour productivity measures took a noticeable step
backwards in the quarter, with GDP per hour worked
falling by 1% q/q and market productivity down 0.9%, as
aggregate hours worked rose in the quarter despite the
weak GDP outcome. However, data released by the ABS
earlier in the week suggested multifactor productivity
grew at 0.6% in 2015/16, an improvement on the previous
year.
Price indicators in the National Accounts were mixed in
the quarter. The GDP deflator – the broadest measure of
inflation – rose 1.1% q/q. However measures of consumer
prices were subdued overall to be consistent with the
modest outcome seen in the Q3 CPI.
In terms of labour income, the growth in total
compensation of employees rose to 1.3% in Q3, which is
a little surprising considering some of the soft trends
evident in the employment data and appears to reflect
higher average hours worked in the quarter. Average
compensation of employees rose by a slightly more
modest 0.8% q/q, but weaker than other price measures
in y/y terms at 1.1%.
Australian Q3 GDP Analysis
-5
-4
-3
-2
-1
0
1
2
3
4
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6
NSW VIC QLD SA WA TAS NT ACT
Key figures
Expenditure components show broad-based weakness
GDP (E) by component
Source: ABS
Monetary policy implications
Thursday’s GDP figures paint a more pessimistic picture
of the Australian economy than anticipated by the RBA in
recent months, and the RBA’s annual growth forecasts
will need to be revised down substantially.
The RBA will be questioning whether the non-mining
recovery is running out of steam earlier than expected,
especially given the similar signal being sent by
employment data and business conditions. It is possible
that the impetus to the economy from the exchange rate
depreciation between 2013 and 2015 has largely run its
course (with the currency having appreciated modestly
through 2016). The RBA’s forecasts are particularly reliant
on solid growth in household consumption and non-
mining business investment, both of which were weak
this quarter.
At this stage, we remain comfortable with our view that
the RBA will be forced to cut rates further in mid-2017
amidst low inflation and a softening outlook for GDP into
2018. If anything, today’s figures suggest that the risk is
for an earlier move, particularly if house price growth
slows into the new year. Attention between now and the
RBA’s next meeting in February will be on whether partial
data remains weak, or picks up again, signalling that this
has just been a temporary mid-cycle slowdown
OPEC and non-OPEC producers finalised the details
of cuts agreed to in Vienna back in September
Spot Crude Oil prices have rallied strongly in
response, but the forward curve has actually flattened
Metal prices have mostly held on to post-US election
gains
Brent Crude prices have spent most of the last week
trading around $US 54 rallying strongly from the high 40's
following the outcome of the OPEC meeting in Vienna.
OPEC producers have agreed how to spread the burden
of 1.2 million barrels per day of production cuts in order to
get total production back down to the 32.5 million barrel
cap agreed in Algiers back in September. The agreement
supposedly takes effect from Jan 2017, and is valid for 6
months (extendible for another 6 months) and has the
Saudis shouldering the bulk of the cuts (500k barrels) with
Iraq and UAE also chipping in with 150k-200k each.
Adding to collective cuts Russia has agreed to 300k
barrels of cuts and other non-OPEC producers sharing
another 300k, all up a total of 1.8 million barrels.
The energy markets have responded favourably to this
news, but there will be plenty of twists as this story
develops. The total agreed cuts of 1.8 million barrels will
certainly go a long way to correcting the current global
oversupply in oil, however I have my doubts as to whether
the OPEC nations will adhere to their limits. Also as the
price improves, high cost shale producers will be
encouraged to resume pumping and potentially bring at
least the 1 million barrels per day back on stream which
has been lost since prices fell in mid 2014. Interestingly,
despite the rally in spot prices the longer dated forward
curve for Brent is lower, perhaps reflecting an eagerness
for producers to protect themselves against price drops
and lock in margins.
Locally, diesel prices are at their highest levels since mid
2015 reflecting the higher $US prices for crude and
refined products. Much of the immediate future direction
will depend on OPEC January production figures, as hard
evidence will be apparent regarding the success or
otherwise in achieving the agreed production caps.
Base metal prices have mostly held on to the post Trump
victory gains, with the markets responding favourably to
his infrastructure plans and likely demand for raw
materials especially copper. It may be difficult for the
market to remain patient enough to hold on to these gains
by the time groundbreaking occurs for any of Trump's
plans, so I expect the markets to ease from these levels
as the election result and likely impacts fades into a
distant memory.
Commodity US$
Change
(daily US$)
Change
(Fortnight)
Change
(Month)
Change
(Year)
Brent Crude 53.05 -0.87 8.00% 15.23% 14.90%
WTI Crude 49.84 -1.07 3.77% 10.80% 15.80%
Copper 5,779 -95.40 0.83% 13.66% 12.28%
Zinc 2,724 -59.57 2.34% 10.94% 60.98%
Aluminium 1,750 38.32 -1.60% 1.64% 21.11%
Tin 21,215 -59.83 -0.86% -3.30% 41.34%
Nickel 11,366 -198.96 -1.73% 2.49% 9.72%
Carbon and Commodities
-25
-20
-15
-10
-5
0
5
10
15
20
25
1985 1989 1993 1997 2001 2005 2009 2013
NZD TWI PPP Over/Under Valuation %
TWI 'over-valued'
TWI 'under-valued'
Source: BNZ
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
-10
-5
0
5
10
15
20
25
30
35NZD PPP Over/Under Valuation %
Source: BNZ
percent deviations (lhs)
std deviations (rhs)
8-Dec USD AUD EUR GBP JPY CNY CAD
Spot 0.7150 0.9570 0.6650 0.5670 81.50 4.92 0.9470
PPP 0.7060 0.9070 0.5430 0.4390 64.20 5.29 0.8100
% Dev 1.4 5.5 22.5 29.1 26.8 -7.0 16.9
st devs. 0.1 0.8 2.0 1.7 1.6 -0.6 1.9
On a TWI basis, the NZD has traded above our long-
term (PPP) fair value estimate for much of the past 12
years, supported by NZ's strong terms of trade. The
current level of the TWI is about 7% above our long-
term FV estimate, which is actually below the average
"valuation" gap of the past 12 years.
There are large divergences on the crosses, with the
NZD well above long-term FV against EUR, GBP, JPY
and CAD. The NZD is below FV against CNY, while
only slightly above against USD and AUD.
Our projections suggest more of the same, with little
in the way of the closing of the gap with long-term FV
over the coming year on most of the crosses.
In this report we provide updated long-term fair value
estimates for the NZD based on our purchasing power
parity (PPP) model. Our PPP estimates are based on CPI
ex GST indices and we run a 15-year moving average filter.
We think that using a 15-year filter effectively allows for
any structural adjustments in the economy over time, and
avoids our long-term estimates being “contaminated” by
long-term historical data.
On a TWI basis (using the six largest components which
make up 76% of the index), the NZD is about 7% above
our long-term fair value estimate. We consider this only
moderately “over-valued”. Indeed, the NZD is less
“over-valued” than the circa 10% average over the
past twelve years.
NZD TWI Only Moderately Above Long-Term Fair Value
The NZD has typically traded above long-term fair value for
such a long time owing to the above-normal terms of
trade. In this sense the “over-valuation” of the NZD hasn’t
caused any great harm overall. Indeed, NZ’s external
accounts show NZ’s current account deficit running lower
than average and NZ’s net international investment
position has not deteriorated over the past twelve years.
In our view, the TWI is not at a level which should cause
much concern, but it is fair to say that various cross rates
are significantly above long-term fair value, and this will be
causing competitive issues for some exporters. The next
table and chart highlight the variance in valuation across
various NZD exchange rates.
At one extreme, the NZD is trading more than 1.5
standard deviations above PPP against EUR, GBP, JPY
and CAD. In percent form, the “over-valuation” ranges
from 17% for NZD/CAD to 29% for NZD/GBP.
The reason the NZD is only moderately “over-valued” on a
TWI basis is that for the three crosses with the largest
weights, the NZD isn’t trading significantly different from
PPP. Against CNY, the NZD is about 7% cheap.
NZD/USD is barely above our PPP estimate and NZD/AUD
is about 5% above.
NZD Long-Term Fair Value (PPP) Cross Rates
NZD Trading Above Long-Term FV On Most Crosses
Currencies usually trade away from long-term fair value
because of cyclical or short-term drivers. Most of the time
there are good reasons why currencies trade well away
from long-term fair value estimates. Thus, just because a
currency trades significantly above long-term fair value
doesn’t necessarily mean it is over-valued or expected
to correct.
Our projections suggest “more of the same”. NZD/EUR,
NZD/GBP and NZD/JPY are all expected to trade
significantly above long-term fair value over the next year,
so exporters hoping for some relief are likely to be
disappointed. Quantitative easing policies and policy
rates near zero in all three regions should keep those NZD
crosses highly elevated for some time yet. The positive
domestic NZ forces, such as strong terms of trade and an
economy growing above trend, support that call.
NZD vs. Long-Term Fair Value Estimates
NZD/USD Trading Close to Long-Term FV
NZD/EUR Trading 2 Std-Devs Above Long-Term FV
NZD/JPY Trading Well-Above Long-Term FV
NZD/AUD Trading Slightly Above Long-Term FV
NZD/GBP Trading 2 Std-Devs Above Long-Term FV
NZD/CNY Trading Below Long-Term FV
Our outlook for NZD/AUD suggests a fairly steady cross
rate, with a bias to rise, rather than fall over time. This
reflects NZ’s more positive cyclical outlook versus
Australia over the next year or two.
NZD/CNY is expected to appreciate a little over the next 6-
9 months, closing the gap with long-term fair value.
Downward pressure on CNY is likely to remain pervasive
for some time, due to significant capital outflows facing
the country. The government is actively trying to limit the
pressure on those large capital outflows – via capital
controls and selling foreign reserves – but this just means
a more prolonged depreciation of CNY than if the currency
was freely floating.
On our forecasts, NZD/USD is expected to face some
downward pressure next year, largely a reflection of
positive forces for the USD, such as plenty of scope for
US monetary policy to tighten and an imminent easing in
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1996 1999 2002 2005 2008 2011 2014
NZD/USD
Source: BNZ
NZD/USD
PPP
2 stdev error bands
0.30
0.35
0.40
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
1996 1999 2002 2005 2008 2011 2014
NZD/EUR
PPP
NZD/EUR
Source: BNZ
2 stdev error bands
30
40
50
60
70
80
90
100
1996 1999 2002 2005 2008 2011 2014
NZD/JPY
PPP
NZD/JPY
Source: BNZ
2 stdev error bands
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1996 1999 2002 2005 2008 2011 2014
NZD/AUD
Source: BNZ
NZD/AUD
PPP
2 stdev error bands
0.20
0.25
0.30
0.35
0.40
0.45
0.50
0.55
0.60
1996 1999 2002 2005 2008 2011 2014
NZD/GBP
PPP
NZD/GBP
2 stdev error bands
Source: BNZ
2.00
3.00
4.00
5.00
6.00
7.00
8.00
1996 1999 2002 2005 2008 2011 2014
NZD/CNY
PPP
Source: BNZ
NZD/CNY
2 stdev error bands
fiscal policy. This should provide some relief for exporters.
We target USD0.67 by mid-2017.
Overall, our TWI projections hover within a few percent of
the current level through the next couple of years, given
the mixed view on the crosses. In an overall sense then,
the NZD is expected to remain a “strong” currency,
leaving it above long-term fair value for some time.
We strongly disagree with RBNZ Governor Wheeler’s
belief that “the exchange rate is higher than the economic
fundamentals would suggest is appropriate.” The NZD is
strong for good reason and is likely to remain that way.
Figure 4 in Wheeler’s speech this week neatly illustrated
this point.
RBNZ’s Own-Analysis Suggests NZD Fairly-Priced
Mostly neutral NZD
- The model is neutral on the NZD apart from the long
NZD/JPY position entered a couple of months ago
and making good profit. Short positions in NZD/USD
and NZD/GBP were closed at the end of last month.
Mostly neutral USD
- The recent period of consolidation in the USD has
seen the model close the previous long USD
positions. The model moved to a long GBP/USD
position last week and the existing long USD/JPY
position has been maintained.
FX Momentum Model
BNZ Foreign Exchange Momentum Model
Our momentum model is used primarily as an indicator
of speculative account activity, as opposed to a trading
tool. The model provides some indication of the levels at
which speculative accounts may be entering into long or
short positions in the major currencies. It can also
provide a steer on how basic trend following/momentum
accounts are positioned.
The basic trading algorithm our model uses is as follows:
1. Buy if the price breaks above recent ranges, or sell if
it breaks below recent ranges.
2. In exiting a position, the model uses a trailing stop.
The stop is set at the previous10-day high or low, but
with an additional adjustment factor that sets a wider
stop when markets are more volatile.
Together, these two conditions constitute the core of
any momentum model, whose central premise is that a
break outside of a range indicates that the price will
continue in the direction of the break. A couple of extra
conditioning filters have been added to our momentum
model to try to stop the model reacting to false breaks.
7-Dec-16
Currency pair Position Entry date Entry level Mkt Return Stop
Long
trigger Short trigger
NZD/USD Neutral 30-Nov-16 0.7144 0.7148 0.7393 0.6972
NZD/AUD Neutral 17-Nov-16 0.9486 0.9563 0.9646 0.9279
NZD/EUR Neutral 06-Dec-16 0.6636 0.6649 0.6767 0.6317
NZD/GBP Neutral 30-Nov-16 0.5738 0.5668 0.5976 0.5166
NZD/JPY Long 19-Oct-16 75.06 81.48 8.6% 78.29
AUD/USD Neutral 05-Dec-16 0.7497 0.7474 0.7772 0.7311
AUD/JPY Long 07-Nov-16 80.64 85.20 5.7% 82.16
DXY Neutral 05-Dec-16 100.64 100.25 102.05 95.89
EUR/USD Neutral 06-Dec-16 1.0690 1.0749 1.1300 1.0506
GBP/USD Long 01-Dec-16 1.2674 1.2613 -0.5% 1.2416
USD/JPY Long 09-Nov-16 105.53 113.99 8.0% 110.86
USD/CHF Neutral 05-Dec-16 1.0060 1.0076 1.0205 0.9550
USD/CAD Short 02-Dec-16 1.3265 1.3234 0.2% 1.3458
Notes: This portfolio represent hypothetical, not actual, investments. Reported returns do not include the cost-of-carry.
All trades are entered and exited at triggered levels
FX Momentum Model Positions
After bottom-feeding for a very long time now, market expectations for future cash rates are moving higher. The most
significant move over the past month has occurred for the US market. Fed funds futures now price a Fed funds rate at
1.60% by mid-2019. A month ago this pricing was at just 1.20%. Current pricing still fall someway short of the Fed’s own
‘dot’ points which will be republished at the Fed’s meeting next week.
The market has also turned itself to the next RBNZ and RBA rate hiking cycle. It now prices a first RBNZ hike by H1 2018.
It also prices an RBA hike by late 2018. Pricing for NZ is closely aligned to our own view.
The ECB and Bank of England are not expected to do much with their rate settings in the year ahead. The markets focus for
the upcoming ECB meeting is rather on any adjustments to its QE program, and hints at ‘tapering’.
New Zealand United States
Australia Eurozone
United Kingdom
Cross Country
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19
Current
10-Nov
Source: Bloomberg
%
Market Expectations
Market expectations (from OIS rates)
Expectations for RBNZ Cash Rate
0.0
0.5
1.0
1.5
2.0
Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19
Current
10-Nov
Source: Bloomberg
%
MarketExpectationsMarket expectations (from Fed Fund Futures)
Expectations for Fed Funds Rate
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1-Feb-11 3-Jul-12 3-Dec-13 8-Apr-15 3-Aug-16 6-Dec-17
Current
10-Nov
Source: Bloomberg
%
MarketExpectations
Market expectations (from OIS rates)
Expectations for RBA Cash Rate
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17
Current
10-Nov
Source: Bloomberg
%
MarketExpectations
Market expectations (from OIS rates)
Expectations for ECB Cash Rate
The BNZ OIS-ter: Reaching For the Light
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18
Current
10-Nov
Source: Bloomberg
%
MarketExpectations
Market expectations (from OIS rates)
Expectations for BoE Cash Rate
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Feb 11 Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Feb 18 Feb 19
NZ (curr) AU (curr) US (curr)
EU (curr) UK (curr)Source: Bloomberg
%
Market Expectations
Market Expectations (from OIS and FFR)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
BNZ forecasts
Current market pricing
RBNZ (OCR track - Nov 16 MPS)
%
Source: Bloomberg, RBNZ, BNZ
Projections for NZ OCR
NZ Official Cash Rate
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
1.0
1.5
2.0
2.5
3.0
3.5
Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16
US 10-year bond yield NZ 10-year bond yieldSource: Bloomberg
% %
Market increasingly pricing next RBNZ hiking cycle
But we see near-term resistance to NZ 2-year swap
breaking above 2.35%
Higher long-end yields into next year, though near-
term consolidation likely
Further curve steepening to come
Strategically we look for wider NZ-AU short-end
spreads
We are watching LGFA-NZGB long-end spreads to
position for compression
Outright Yields
At the short-end of the NZ curve, we continue to see
resistance to NZ 2-year swap breaking above 2.35% near-
term. Technically, this marks the highs of its range since
March this year. Fundamentally, that level would be
consistent with the market pricing OCR hikes from early in
H2 next year. We believe that is probably premature.
We see the RBNZ hiking from H1 2018. By then we
anticipate NZ CPI will be showing signs of nudging above
the RBNZ’s 2% mid-target. Normally, you might expect
the Bank to anticipate this with pre-emptive rate hikes.
This time, however, we suspect the Bank will be patient,
as inflation has consistently under-shot expectations in
recent years. A bit of inflation will likely be welcomed,
rather than seen as a threat.
Recall, the RBNZ’s own projections, as of the November
MPS, show no hikes at all over the forecast period to
end-2019.
Market Seriously Thinking About the Next Hiking Cycle
There is a big break until the RBNZ‘s next rate
announcement on 9 February. There is plenty of water to
flow under the bridge before then, particularly on the
global front. There are two US Fed meetings (14 Dec, 1
Feb), a US presidential inauguration (20 Jan), a meeting of
OPEC and non-OPEC members (10 Dec), not to mention
two meetings of the ECB (8 Dec, 19 Jan). These provide a
multitude of risks. Their impact will be most keenly felt at
the long-end of the NZ curve, influenced by the direction
of US long yields.
We expect the Fed to deliver a hike next week. But it’s
already fully priced. Focus will therefore be on the Fed’s
‘dots’, and any change in the Fed’s sentiment regarding
inflation risks and the impact of the strong USD.
Long end yields are already pricing a lot of the good
macro news, momentum indicators are oversold, while
market positioning suggests less risk of a further gap
higher in yields. As such, into year-end we expect some
consolidation in US long-end yields. Our year-end US
10-year target remains at 2.30%. But given upside risks
into the new year, we still favour using rallies to enter
short positions in the long end of the curve. We see the
balance of risks pointing to higher rates in 2017.
Next year, we anticipate US 10-year yields may eventually
settle around 2.50%, but with risks of an initial overshoot.
So after a period of consolidation we also anticipate NZGB
long yields will push higher next year. A push up to
3.40% would be consistent with a US 10-year at 2.50%,
though some overshoot is also very possible.
US Yields Remain Key Driver of NZ Yields
The Yield Curve
We continue to expect the NZ 2s10s swap curve will
reach 125bps in early 2017. As we see the NZ short-end
being range-bound near-term, curve direction will largely
be determined by moves in offshore yields.
We also continue to look for further steepening in the
NZ 1s3s curve, to 60bps by mid next year. However,
we would not be surprised to see some consolidation
near-term.
We see the medium-term steepening being influenced by
a further rise in offshore yields and also the market
nudging higher its expectations for where the NZ OCR will
ultimately reach in this cycle. Currently the swap curve is
Interest Rate Strategy: The Big Break
consistent with the OCR not getting above 3.25% in this
cycle. We have a 3.75% peak penciled in. This would still
be well below previous cycle peaks, recognizing a lower
‘neutral’ rate.
Further Steepening Ahead For The NZ 1s3s Swap Curve
Spreads to Offshore
Broadly we look for a NZGB-UST 10-year spreads in a 60-
100bps range in the months ahead. Currently we are
around mid-range. We anticipate modest widening of
NZGB-ACGB 10-year spreads, as we see NZ as being
further advanced in its rate cycle than Australia. A risk to
this view might be the more restrained supply outlook we
see for NZGBs relative to ACGBs.
At the short-end of the curve, NZ-AU spreads continue to
trade a fairly tight range. This is unlikely to change until
the market starts to consider further RBA rate cuts next
year (our NAB colleague’s central view), or we get closer
to the start of the RBNZ’s rate hiking cycle. On a move
down to 30bps on NZ-AU 2-year swap spreads we would
consider positioning for widening.
Strategically, Look For Wider NZ-AU Short-End Spreads
LGFA Spreads
In recent weeks LGFA-NZGB 2027 spreads have been
trading around the mid-90s level. We believe they appear
reasonably attractive to position for spread compression,
though the trade is more compelling above 100bps. Aside
from offering spread compression, the bonds continue to
provide a notable yield pickup to NZGB equivalents, at the
same credit rating as the sovereign. The key risk to
spreads remains deterioration in global risk appetite.
The final LGFA tender for the year will take place on 14
December, with details of bonds on offer to be
announced on Monday 12th.
LGFA Bonds Offer Yield Pick-up To NZGBs
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0-1.2
-0.7
-0.2
0.3
0.8
1.3
1.8
Jan 01 Jan 04 Jan 07 Jan 10 Jan 13 Jan 16
NZ 1y-3y curve
NZ OCR (rh)
Source: Bloomberg
%
F'cst
% (inverse)
0
20
40
60
80
100
120
Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Aug 15 Feb 16 Aug 16
LGFA 6.00% 15/12/17 LGFA 5.00% 15/03/19 LGFA 6.00% 15/05/21
LGFA 5.50% 15/04/23 LGFA 4.25% 04/15/27Source: BNZ
LGFA Bond Spread To NZGB(bps)
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 18
NZ-AU cash rate differential NZ-AU 2-year swap spreadSource: BNZ
Forecasts
%
-5
0
5
10
15
20
Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15
% change
Monthly
Household Borrowing
Source: RBNZ, BNZ
Annual
Month annualisedLVR 10% speed limit imposed
400
600
800
1000
1200
1400
1600
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Monthly Sales
Monthly
Barfoot's House Sales(seasonally adjusted, BNZ)
Source: Barfoot and Thompson, BNZ
Dec 2014 spike, post
Beat the policy changes of Oct/Nov 2015??
Unwind from pre-policy change rush??
GeneralElection
LVR policyintroduced
LVRtightening annouced
Earthquake Impacts/Assessment
As fuller assessments are made, greater damage from
November’s earthquakes is being discovered. This
includes a number of commercial buildings in Wellington,
a few already greeting the wrecking ball. This is adding to
business disruption but also to building requirements in
due course. Meanwhile, progress is being made on
reconstituting transportation links in the north-east of the
South Island, but it’s necessarily slow work. All considered
the quake impacts remain nothing to materially alter of
view of the NZ macro-economy.
Merchandise Trade (Oct) – 25 November
October’s merchandise trade deficit, of $846m, was a bit
smaller than expectations, despite big aircraft imports.
Export values increased 2% y/y and stronger growth looks
likely in 2017. We remain a bit puzzled by the lack of
material expansion in core capital goods imports.
However, the further acceleration in consumer goods
imports in October made sense to us.
Financial Stability Report – 30 November
In this FSR the RBNZ highlighted housing, dairy and bank
funding as the main risks to financial stability. However,
what stood out for us was increased discussion and
analysis around debt-to-income (DTI) lending ratios, which
the Bank worries are getting too lofty. Yet the government
sounds reluctant about granting the DTI-limit tool that the
Reserve Bank would seem to desire for bank lending.
ANZ Business Survey (Nov) – 30 November
Net confidence might have dipped to +20.5 in November,
from +24.5 the month before. But all the real-activity
indicators in this business survey remained stout. Own-
activity-expectations, for example, held at +37.6, from
+38.4. This tends to suggest annual GDP growth with a
three in front of it, while itching for a four. Pricing
intentions moved up to +20.8, from +17.6 in October
while general inflation expectations edged up to 1.49%,
from 1.44%. The results, overall, are consistent with the
RBNZ/OCR being on hold, but with promises of
normalizing policy rates some time down the track.
Credit Aggregates (Oct) – 30 November
While no great surprise, it was interesting to see that
October’s household credit expanded 0.6%. This followed
0.7% for September and 0.8% for August. Annual growth
slowed to 8.7%, from 8.8%. We can probably expect a bit
more of a slowdown – at least over the immediate term –
as the latest LVR tightening does its thing. As for
household deposit growth, this bucked its recent trend,
picking up to an annual 7.5%, from 6.7%. Meanwhile
agriculture credit continued to slow in its yearly pace, with
3.8%, compared to 4.0% y/y in September. Business
credit continued to pick up, with annual growth of 8.0%,
from 7.8%.
Credit Checks
Overseas Trade Indexes (Q3) – 1 December
The merchandise terms of trade proved a bit weaker than
expected, in falling 1.8%. But a lot of this we put down to
timing, especially around dairy prices. We still expect this
“official” measure of the terms of trade to lift strongly over
coming quarters to be testing, if not achieving, record
levels over the first half of 2017. As for the OTI trade
volumes, on balance they did not alter Q3 GDP growth
estimate, namely +0.8%, or the downside risks we still
sense around it.
QVNZ Housing Report (Nov) – 1 December
Chatter about the housing market coming off a bit is, at
last, beginning to show in some of the numbers. Annual
inflation in this Quotable Value NZ house price index, for
example, slowed further in November, to 12.4%. This was
from 12.7% in October, and 14.3% back in September,
entailing a quarterly advance of just 2.0%.
Barfoot’s Housing Report (Nov) – 5 December
Barfoot & Thompson’s November housing report saw
further signs of Auckland housing losing some steam.
Sales failed to bounce much from their noticeable drop in
October, while annual inflation in its average sales price
eased back to 6.5%. The latter was after registering
double-digit gains in each of the past three months.
Dissipating Heat
NZ Economic Review
0
200
400
600
800
1000
1200
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2002 2004 2006 2008 2010 2012 2014 2016
NZ centsper kgMS
Index
Season
GDT and Fonterra Milk Price
Fonterra Milk Price
GDT NZD Index
GDT USD Index
Source: Fonterra, BNZ
-5
0
5
10
15
20
25
30
35
40
45
50
55
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
% of GDP
Fiscal Years
Core Fiscal Balance and Net Debt
Operating balance (lhs)
Net debt (rhs)
% of GDP
* Operating balance before accounting and revaluation changes Source: Treasury, BNZ
HYEFU 2016
Forecasts
John Key Announces Resignation as PM – 5 December
Shocking most everyone, John Key announced he would
be resigning as Prime Minister. In doing so, he
recommended current Deputy PM, and Finance Minister,
Bill English to take over. The National party caucus will
vote on their new leader, and hence New Zealand’s new
PM, Monday next week.
ANZ Commodity Export Prices (Nov) – 5 December
World prices for New Zealand’s major primary export
products rose 2.7% in November, to be up 13.1% on a
year ago. In NZ dollar terms, the gains were 2.7% m/m
and 2.6% y/y. Dairy was again the driver, rising 4.8% m/m
in world price terms in this index and extending strong
gains over recent months.
Crown Financial Statements (Oct) – 6 December
The 4-months to October 2016 core (OBEGAL) operating
deficit was just $131m, compared to the $1,065m deficit
expected in the May Budget. This momentum looked set
to carry things into a surplus for the full year to June 2017
much greater than the $700m anticipated by the May
Budget, if it weren’t for the recent quakes.
GDT Dairy Auction, 2016/17 Milk Price – 7 December
The GDT weighted Price Index rose 3.5% at this latest
auction, to be up 51% on a year ago. With this result
building on recent gains, we brooked no delay in revising
up our forecast for the 2016/17 milk price. We now project
$6.40, rather than $6.00. Fonterra simply revised up to
$6.00 only a few weeks ago, and announced no
adjustment to this today, on the occasion of its AGM. Still,
it has room to upgrade at some stage soon, in our view.
With the 2015/16 milk price of $3.90, we’re now talking a
64% lift – turning moderate operating losses, on average,
into reasonable profit.
Back from the Brink
ANZ Job Ads (Nov) – 7 December
The astounding run in this job advertising series continued
in November, with a seasonally adjusted expansion of
2.9%. This took its annual growth rate to 15.7%.
RBNZ Governor Wheeler Speaks – 8 December
While Graeme Wheeler affirmed the generalities of the
November Monetary Policy Statement he also sounded a
little more confident about the economy’s progression.
See our lead article in today’s BNZ Strategist for a bit
more discussion on this speech from Graeme Wheeler.
National Accounts (year to March 2016) – 8 December
There were some interesting results in these, such as
revised higher annual nominal GDP over recent years, a
more negative household savings rate but a higher
national savings rate. We’ll assess these accounts in more
detail when we get the chance. This includes any
implications they may have for the annual revisions that
are due in the Q3 2016 GDP accounts.
Half-Year Economic and Fiscal Update – 8 December
The HYEFU was as positive as expected, keeping the
government’s options open regards spending, tax
reductions and debt repayment. For more on this please
see our lead article in today’s BNZ Strategist.
What To Do With the Extra Dough?
70
80
90
100
110
120
130
140
150
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
NZ Consumer Confidence
Source: Westpac, McDermott Miller, ANZ, Roy Morgan Monthly
Index
ANZ-Roy Morgan
Westpac McDermott Miller
Source: Westpac, McDermott Miller, ANZ, Roy Morgan Monthly
Index
Westpac McDermott Miller
34
38
42
46
50
54
58
62
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16
Diffusion Index, seas. adj.
Monthly
Industry Performance Indexes
Source: BNZ / Business NZ
Breakeven
Services
Manufacturing
Be aware that Statistics New Zealand’s data release
schedule remains subject to delay and/or truncation,
owing to November’s earthquakes. Release dates
for non-Statistics New Zealand data have not been
affected, however.
And given that this is the last BNZ Strategist of 2016 (with
the first of 2017 due 19 January), we’ve extended this
section out into early next year.
Electronic Card Transactions (Nov) – 9 December
Conscious of some initial disruption from the recent
earthquakes, and with reference to some weekly spending
figures we monitor, we anticipate a 0.5% fall in
November’s transaction values.
National Party Votes on New Leader – 12 December
With John Key resigning, the National party caucus votes
on its new leader, and thus Prime Minister. Current
Deputy and Finance Minister, Bill English, is widely touted
as the front-runner and has received Key’s endorsement.
REINZ Housing Report (Nov) – 12 December
Auckland’s housing market is clearly losing some of its
intensity. So these Real Estate Institute figures will be
more instructive for what they say about the rest of the
country. But also be mindful of disruption from
November’s earthquakes, especially in Wellington’s
market but also Marlborough/Nelson and Canterbury.
Wholesale Trade (Q3) – 12 December
To be consistent with our GDP expectations, we’d like to
see an increase in nominal wholesale trade nudging 1%
for the September quarter, seasonally adjusted. This
would infer a decent bounce in wholesale’s real activity
given minimal inflation (as per the PPI).
Manufacturing Sales (Q3) – 13 December
Will the September quarter manufacturing sales and
inventory data infer moderate increase in production as
we have pencilled in regards GDP calculations? We are
wary of some weakness in meat and dairy processing, but
look to other primary and non-primary industries picking
up the slack.
BNZ Manufacturing PMI (Nov) – 15 December
October’s Performance of Manufacturing Index slowed to
55.2 but its employment index firmed further to 53.8. We’ll
be interested in both results for November.
Building Work Put in Place (Q3) – 15 December
New Zealand’s construction indicators remain
overwhelming positive. However, we are guarded about
this particular BWPIP result – given it follows two
consecutive quarters growth of at least 5% each. Even if
it’s technical, anything less than the moderate increase
we anticipate would put some downside risk to our
current calculations for Q3 GDP.
ANZ-RM Consumer Confidence (Dec) – 16 December
Last month’s survey was mostly pre-quakes so this will be
the first to be fully post. Even so, consumer confidence
has established some strong momentum this year. This
was evident in November’s reading, which lifted to a
seasonally adjusted 128.7, from 126.2 in October, to be a
full 10 points above its long-term average.
Stirred Not Shaken?
WMM Consumer Confidence (Q4) – 19 December
We can imagine this Westpac McDermott Miller reading
on consumer confidence will increase, but we’re not sure
by how much. Generally speaking, its level has lagged that
of the ANZ index.
BNZ Services PMI (Nov) – 19 December
This Performance of Services Index bounced back nicely
in October, to an above-average 56.3, from the middling
54.2 it had eased to in September.
Strong Momentum
Building Consents (Oct) – 19 December
The forward indicators for construction remain as positive
as ever, so the trends here should remain so too. But
anything is possible in any particular month.
NZ Upcoming Data/Events
ANZ Business Survey (Dec) – 19 December
This will be the first run fully post the recent quakes.
Not that we believe the seismic activity will have any
discernable net impact, on an array of numbers that,
in November, we very encouraging.
Food Price Index (Nov) – 20 December
For the record, we anticipate a 0.3% fall in November’s
Food Price Index, when compared to October’s. This
would be consistent with Q4 CPI increasing +0.5% q/q
and +1.4% y/y.
GDT Dairy Auction – 21 December
Being almost 2 weeks hence, we can’t make any fine calls
on this auction, at this stage, but we’d be surprised if
prices fell.
Merchandise Trade (Nov) – 21 December
Meat and dairy production has been struggling over
recent months. However, sharply higher dairy prices
promise to more than counter this, in terms of overall
export values. For merchandise imports, we’ll want to see
better results for (core) capital goods.
Int’l Travel and Migration (Nov) – 21 December
New Zealand’s net inward migration is very closely
followed nowadays, for obvious reasons, and November’s
outcome will be no different in this respect. But will there
be a difference in terms of numbers. We’ll also be
interested in the short-term visitor arrivals, especially as
there have been no weekly data on these to monitor since
the 14 November temblor.
New Residential Lending (Nov) – 21 December
The main NZ banks lent $5.37b in new mortgages during
October. This was 8.3% lower than a year ago. Yet the
level is hardly weak, in fact up 10% on two years ago.
Interestingly, the value of mortgage lending to investors
was down 15% on a year earlier, but for first-home buyers
increased 14%. It will be interesting to see if these
tendencies continued throughout November.
GDP (Q3) – 22 December
We expect a 0.8% increase in September quarter GDP (for
an annual result of 3.6%). However, we remain a bit
nervous of some technical/timing weakness, so will be
monitoring the partials yet to be released (manufacturing,
building, wholesaling) like a hawk. Generally speaking,
however, we can see a lot that will drive solid GDP growth
well into 2017.
Guarded Optimism
Balance of Payments (Q3) – 22 December
Scheduling issues mean that this key report clashes with a
more important one (namely GDP). Nonetheless, it will be
worth checking it out, to see if the current account deficit
remains about as well behaved as we reckon. To be
specific, we expect a year to September deficit of $7.6b,
equivalent to 3.0% of GDP. And we forecast 2.1% for
calendar 2017 as a whole.
Credit Aggregates (Nov) – 22 December
Will there be further slowdown in the housing credit
numbers? That is the key question.
Building Consents (Nov) – 10 January
Electronic Card Transactions (Dec) – 13 January
We would expect bounce-back elements to December’s
transactions, as the worst of the impacts of the
earthquakes in November abate.
Food Price Index (Dec) – 16 January
This will be relevant to the quarterly CPI, as usual.
QSBO (Q4) – 17 January
Even though it’s a ways away, we would bet that this
NZIER Quarterly Survey of Business Opinion will be solid-
to-strong. That is, if something doesn’t go horribly awry
internationally.
CPI (Q4) – 19 January
As of today (8 December) we anticipate a 0.5% increase in
the Q4 CPI. This would lift its annual inflation to 1.4%, from
0.4% in Q3. This would be the first annual result to be
consistent with the 1.0 to 3.0% target band since Q3 2014.
RBNZ Governor Wheeler Speaks – 26 January
This is the customary New Year address to the Canterbury
Employers’ Chamber of Commerce, which tends to be a
scene setter. But now it will help fill the void of having no
late-January OCR review, while also serving as a close
entree to the first Monetary Policy Statement of the year,
which from now on are to be in early February.
Labour Market Reports (Q4) – 1 February
RBNZ MPS – 9 February
-4
-3
-2
-1
0
1
2
3
4
5
6
7
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Gross Domestic Product
Quarter Annual
Source: BNZ, Statistics NZ
% change
Annual trend
Quarterly
Forecasts
Quarterly Forecasts
Forecasts as at 8 December 2016
Key Economic Forecasts
Quarterly % change unless otherwise specified Forecasts
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17
GDP (production s.a.) 0.4 0.8 0.9 0.9 0.9 0.8 0.8 0.7 1.1 0.4
Retail trade (real s.a.) 0.0 1.6 1.1 0.9 2.2 0.9 0.9 0.9 0.8 0.6
Current account (ytd, % GDP) -3.6 -3.5 -3.4 -3.1 -2.9 -3.0 -3.0 -2.7 -2.4 -2.2
CPI (q/q) 0.4 0.3 -0.5 0.2 0.4 0.3 0.5 0.7 0.4 0.5
Employment 0.0 -0.2 0.9 1.4 2.4 1.4 0.6 0.5 0.7 0.6
Unemployment rate % 5.5 5.5 5.0 5.2 5.0 4.9 4.9 5.0 5.0 5.0
Avg hourly earnings (ann %) 3.2 2.7 2.5 2.5 2.1 1.6 1.8 1.9 1.8 2.5
Trading partner GDP (ann %) 3.4 3.4 3.3 3.2 3.3 3.3 3.2 3.1 3.2 3.3
CPI (y/y) 0.4 0.4 0.1 0.4 0.4 0.4 1.4 1.9 1.9 2.1
GDP (production s.a., y/y)) 2.4 2.3 2.3 3.0 3.6 3.6 3.5 3.3 3.5 3.0
Interest Rates
Historical data - qtr average Government Stock Swaps US Rates Spread
Forecast data - end quarter Cash 90 Day 5 Year 10 Year 2 Year 5 Year 10 Year Libor US 10 yr NZ-US
Bank Bills 3 month Ten year
2015 Sep 2.95 3.00 2.75 3.20 2.85 3.15 3.65 0.30 2.20 1.00
Dec 2.70 2.85 2.85 3.35 2.75 3.10 3.60 0.40 2.20 1.15
2016 Mar 2.45 2.55 2.60 3.05 2.50 2.80 3.30 0.60 1.90 1.15
Jun 2.25 2.35 2.20 2.60 2.25 2.45 2.90 0.65 1.75 0.85
Sep 2.10 2.30 1.90 2.25 2.05 2.15 2.45 0.80 1.55 0.70
Forecasts
Dec 1.75 2.05 2.55 3.10 2.20 2.75 3.30 1.10 2.30 0.80
2017 Mar 1.75 2.05 2.45 3.15 2.25 2.80 3.50 1.10 2.50 0.65
Jun 1.75 2.00 2.65 3.30 2.40 2.95 3.60 1.40 2.50 0.80
Sep 1.75 2.00 2.70 3.35 2.50 3.00 3.65 1.40 2.50 0.85
Dec 1.75 2.00 2.75 3.30 2.60 3.05 3.60 1.60 2.50 0.80
2018 Mar 1.75 2.10 2.80 3.30 2.80 3.10 3.60 1.60 2.50 0.80
Jun 2.00 2.40 3.10 3.60 3.10 3.40 3.90 1.90 2.75 0.85
Sep 2.25 2.65 3.15 3.65 3.20 3.45 3.95 2.10 2.75 0.90
Dec 2.50 2.90 3.25 3.65 3.40 3.55 3.95 2.40 2.75 0.90
Exchange Rates (End Period)
USD Forecasts NZD Forecasts
EUR/USD USD/JPY GBP/USD NZD/USD AUD/USD NZD/EUR NZD/JPY NZD/GBP NZD/USD NZD/AUD TWI-17
Current 1.08 114 1.27 0.72 0.75 0.67 81.8 0.57 0.72 0.96 78.9
Dec-16 1.02 110 1.23 0.72 0.75 0.70 79.2 0.58 0.72 0.96 79.7
Mar-17 0.98 112 1.21 0.70 0.73 0.71 78.4 0.58 0.70 0.96 79.5
Jun-17 1.00 114 1.20 0.68 0.72 0.68 77.5 0.57 0.68 0.94 77.7
Sep-17 1.02 113 1.19 0.67 0.70 0.66 75.7 0.56 0.67 0.96 76.8
Dec-17 1.04 112 1.20 0.67 0.70 0.64 75.0 0.56 0.67 0.96 76.5
Mar-18 1.05 110 1.20 0.68 0.69 0.64 74.3 0.56 0.68 0.98 77.1
Jun-18 1.06 109 1.21 0.68 0.68 0.64 74.1 0.56 0.68 1.00 77.5
Sep-18 1.08 108 1.22 0.69 0.68 0.63 74.0 0.56 0.69 1.01 77.7
Dec-18 1.10 107 1.22 0.69 0.69 0.63 73.8 0.57 0.69 1.00 77.5
Mar-19 1.11 106 1.25 0.71 0.70 0.64 74.7 0.56 0.71 1.01 78.6
TWI Weights
0.1135 0.0635 0.0456 0.1398 0.2073
Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ
Forecasts
Forecasts December Years
as at 8 December 20162015 2016 2017 2018 2019 2014 2015 2016 2017 2018
GDP - annual average % change
Private Consumption 2.6 2.3 3.8 2.2 2.1 2.7 2.3 3.5 2.6 2.1
Government Consumption 2.3 1.8 1.5 1.3 1.1 2.7 2.0 1.4 1.4 1.2
Total Investment 9.7 3.0 8.5 6.6 3.9 10.9 3.0 7.4 7.6 4.5
Stocks - ppts cont'n to growth 0.1 -0.2 -0.2 0.3 0.0 0.0 -0.3 -0.1 0.4 0.0
GNE 4.1 2.1 4.2 3.6 2.4 4.4 2.0 3.9 4.0 2.5
Exports 4.3 5.5 3.9 2.9 3.4 3.1 6.8 3.2 3.1 3.4
Imports 7.4 2.1 5.0 4.1 3.7 7.9 3.6 3.5 4.7 3.8
Real Expenditure GDP 3.2 3.1 3.8 3.2 2.2 3.0 3.0 3.6 3.5 2.4
GDP (production) 3.6 2.5 3.5 3.0 2.2 3.8 2.5 3.4 3.2 2.4
GDP - annual % change (q/q) 2.9 3.0 3.3 2.7 2.0 4.1 2.3 3.5 2.9 2.1
Output Gap (ann avg, % dev) 0.8 0.9 1.3 1.5 1.3 0.7 0.8 1.2 1.5 1.4
Household Savings (gross, % disp. income) 2.6 1.2 4.2 4.3 3.9
Nominal Expenditure GDP - $bn 239.6 248.7 264.9 281.8 293.1 238.3 245.9 260.2 278.3 290.3
Prices and Employment - annual % change
CPI 0.3 0.4 1.9 1.9 1.9 0.8 0.1 1.4 1.7 1.9
Employment 3.2 2.0 5.0 2.2 1.5 3.6 1.3 5.9 2.3 1.6
Unemployment Rate % 5.4 5.2 5.0 5.2 5.5 5.5 5.0 4.9 5.1 5.4
Wages - ahote 2.6 2.5 1.9 2.7 3.0 3.0 2.5 1.8 2.6 2.9
Productivity (ann av %) 0.1 0.4 -1.9 0.6 0.5 0.2 0.1 -1.3 0.1 0.5
Unit Labour Costs (ann av %) 2.0 2.4 3.8 2.0 2.5 2.4 2.6 3.1 2.4 2.5
External Balance
Current Account - $bn -8.5 -7.8 -7.2 -6.3 -9.4 -7.7 -8.3 -7.7 -5.8 -9.0
Current Account - % of GDP -3.5 -3.1 -2.7 -2.2 -3.2 -3.2 -3.4 -3.0 -2.1 -3.1
Government Accounts - June Yr, % of GDP
OBEGAL (core operating balance) 0.2 0.7 0.2 1.2 1.8
Net Core Crown Debt (excl NZS Fund Assets) 25.1 24.6 24.4 23.6 21.9
Bond Programme - $bn 8.0 7.0 8.0 7.0 7.0
Bond Programme - % of GDP 3.3 2.8 3.0 2.5 2.4
Financial Variables (1)
NZD/USD 0.75 0.67 0.70 0.68 0.71 0.78 0.67 0.72 0.67 0.69
USD/JPY 120 113 112 110 106 119 122 110 112 107
EUR/USD 1.08 1.11 0.98 1.05 1.11 1.23 1.09 1.02 1.04 1.10
NZD/AUD 0.97 0.90 0.96 0.98 1.01 0.94 0.93 0.96 0.96 1.00
NZD/GBP 0.50 0.47 0.58 0.56 0.56 0.50 0.45 0.58 0.56 0.57
NZD/EUR 0.69 0.61 0.71 0.64 0.64 0.63 0.62 0.70 0.64 0.63
NZD/YEN 89.9 76.0 78.4 74.3 74.7 92.6 82.1 79.2 75.0 73.8
TWI 78.3 72.2 79.5 77.1 78.6 78.2 73.2 79.7 76.5 77.5
Overnight Cash Rate (end qtr) 3.50 2.25 1.75 1.75 2.75 3.50 2.50 1.75 1.75 2.50
90-day Bank Bill Rate 3.63 2.42 2.05 2.08 3.08 3.67 2.74 2.05 2.00 2.88
5-year Govt Bond 3.20 2.45 2.45 2.80 3.35 3.66 2.90 2.55 2.75 3.25
10-year Govt Bond 3.35 2.95 3.15 3.30 3.70 3.85 3.45 3.10 3.30 3.65
2-year Swap 3.55 2.30 2.25 2.80 3.50 3.84 2.80 2.20 2.60 3.40
5-year Swap 3.65 2.60 2.80 3.10 3.65 4.04 3.15 2.75 3.05 3.55
US 10-year Bonds 2.05 1.90 2.50 2.50 2.75 2.20 2.25 2.30 2.50 2.75
NZ-US 10-year Spread 1.30 1.05 0.65 0.80 0.95 1.65 1.20 0.80 0.80 0.90
(1) Average for the last month in the quarter
Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ
ForecastsActualsForecasts
March Years
Actuals
Forecast Median Last
Friday 9 December
NZ, Electronic Card Transactions, Nov -0.5% +0.4% +0.6%
Aus, Housing Finance, October -1.0% +1.6%
China, CPI, November y/y +2.2% +2.1%
Jpn, BSI Business Survey, Q4 +1.9
US, Mich Cons Confidence, December 1st est 94.4 93.8
Monday 12 December
NZ, Wholesale Trade, Q3 ($) s.a. +0.9% +1.7%
Jpn, Machinery Orders, October -3.2%
Tuesday 13 December
NZ, Manufacturing Sales, Q3 vol s.a. +2.8%
Aus, NAB Business Survey, November
Aus, House Prices, Q3 y/y +4.1%
China, Retail Sales, November y/y +10.2% +10.0%
China, Industrial Production, November y/y +6.1% +6.1%
Germ, ZEW Sentiment, November +13.8
UK, CPI, November y/y +0.9%
Wednesday 14 December
Aus, Consumer Sentiment - Wpac, December 101.3
Jpn, Tankan (lge manuf), Q4 +6
Euro, Industrial Production, October -0.8%
UK, Unemployment Rate (ILO), October 4.8%
US, FOMC Policy Announcement 0.75% 0.75% 0.50%
US, Industrial Production, November -0.4% flat
US, Retail Sales, November +0.4% +0.8%
Thursday 15 December
NZ, Building WPIP, Q3 vol s.a. +2.5% +5.5%
NZ, BNZ PMI (Manufacturing), November 55.2
Aus, Employment, November +10k
Euro, PMI Manufacturing Services, December 1st est 53.7/53.8
UK, BOE Policy Announcement 0.25% 0.25%
UK, Retail Sales vol., November +1.9%
US, Markit PMI, December 1st est 54.1
US, Philly Fed Index, December +9.0 +7.6
US, Empire Manufacturing, December +3.0 +1.5
US, CPI ex food/energy, November y/y +2.2% +2.1%
Friday 16 December
NZ, ANZ-RM Consumer Confidence, November 127.2
Euro, CPI, Nov. y/y 2nd est +0.6%P
US, Housing Starts, November 1,233k 1,323k
Monday 19 December
NZ, ANZ Business Survey, December +20.5
NZ, Building Consents, October (res, #) +0.2%
NZ, BNZ PSI (Services), November 56.3
NZ, WMM Consumer Confidence, Q4 108.0
Jpn, Merchandise Trade Balance, November +Y496b
Germ, IFO Index, December 110.4
US, Markit PSI, December 1st est 54.6
Tuesday 20 December
NZ, Food Price Index, November -0.6%
Aus, RBA Minutes, 6 December Meeting
Jpn, BOJ Policy, Money Base Target +¥80T p.a. +¥80T p.a.
Forecast Median Last
Wednesday 21 December
NZ, External Migration, November s.a.
NZ, Residential Lending, November y/y -8.3%
NZ, Dairy Auction +3.5%
NZ, Merchandise Trade, November -$846m
Euro, Consumer Confidence, December 1st est -6.1
US, Existing Home Sales, November 5.60m
Thursday 22 December
NZ, Household Credit, November y/y +8.7%
NZ, GDP, Q3 +0.8% +0.9%
NZ, Balance of Payments, Q3 -3.0% -2.9%
Euro, ECB Economic Bulletin
US, GDP, Q3 3rd est +3.3% +3.2%P
US, Durables Orders, November 1st est +4.6%
US, Chicago Fed Nat Activity Index, November -0.08
US, Personal Spending, November +0.3%
Friday 23 December
US, New Home Sales, November 563k
Monday 26 December
Jpn, BOJ Minutes, 1 Nov. Meeting
Tuesday 27 December
Jpn, Unemployment Rate, November 3.0%
Jpn, CPI, November y/y +0.1%
US, Consumer Confidence, December 107.1
US, Shiller Home Price Index, October y/y +5.5%
Wednesday 28 December
Jpn, Retail Sales, November y/y -0.1%
US, Pending Home Sales, November +0.1%
Sunday 1 January
China, Non-manufacturing PMI, December 54.7
China, PMI (NBS), December 51.7
Thursday 12 January
NZ, ANZ Comdty Prices (world), December +2.7%
Tuesday 17 January
NZ, QSBO, Q4 +26
Thursday 19 January
NZ, CPI, Q4 +0.5% +0.2%
Thursday 26 January
NZ, Wheeler Speaks, Canterbury ECC
Wednesday 1 February
NZ, Labour Market Reports, Q4 y/y +1.6%
Monday 6 February
NZ, Holiday, Waitangi Day
Tuesday 7 February
NZ, RBNZ 2yr Inflation Expectations, Q1 +1.68%
Thursday 9 February
NZ, RBNZ MPS 1.75% 1.75% 1.75%
Calendar
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