RESEARCH Strategist - BNZ · 2017. 11. 2. · Strategist bnz.co.nz/research 2 November 2017 Page 2 Slump in confidence does not portend slump in activity Though growth likely to undershoot

2 November 2017

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Strategist RESEARCH

our NZD projections, which have the currency anchored around

USD0.69-0.70 through the next 12 months.

Markets Too Focussed on Downside

Risks 2

Onwards and Upwards for US Economy

and FOMC 6

Carbon and Commodities 8

NZD short-term oversold 9

The BNZ OIS-ter: NZ hikes pushed out

post govt. formation 11

Interest Rate Strategy: 12

NZ Economic Review 13

NZ Upcoming Data/Events 15

Quarterly Forecasts 16

Annual Forecasts 17

Calendar 18

Contact Details 19

Economic Outlook

We have had a go at recasting our forecasts based on current

information on likely government policies. This should be thought

of as work in progress and will evolve as we get more detail. As

they stand, our new forecasts will likely grate with those in the

market forming a softer view on NZ (and the RBNZ). Big-picture,

our GDP growth expectations are largely unchanged though

different in composition; inflation more surely gets up around

2%; government debt threatens to track much higher than the

Labour party has signalled and; corporate margins are crimped as

input costs rise. For the record, the RBNZ’s August MPS

published GDP growth track was 3.1% for the year ended March

2018; followed by 3.6% in 2019 and 2.9% in 2020. Our

equivalents are 2.5%, 3.0% and 2.5%. Treasury’s Budget had

3.4%, 3.8% and 3.1% over the same period. If we are correct

then there is clearly downside risk to government revenues which

will be problematic for the government’s expenditure plans.

There are no data of great significance over the coming fortnight.

Interest Rate Outlook and Strategy

The OIS market has pushed the timing of the first full 25bp rate

hike to February 2019 from November 2018 and NZ 2 year swap

has fallen 4bps to 2.16% largely on political headlines. We think

that the NZ front end rally has been excessive. We suspect the

politics-related receiving theme will run out of legs. We expect

the RBNZ to hold the OCR at 1.75% next Thursday, but we

believe the balance of recent economic developments will almost

certainly see the Bank revise up its inflation forecasts. It is less

certain what the bank will choose to do with its interest rate

track. In any case, there seems very little chance that the RBNZ’s

tone will be more dovish that it was in August and it may well be

noticeably more hawkish. Our bias is for a constrained sell-off in

the front end, seeing 2 year swap in a 2.10-2.30% range. 5s look

too rich on swap curve against 2s and 10s.

Currency Outlook

Domestic political forces have seen the NZD underperform since

the election, across a broad range of currencies. We see the NZD

as oversold on this basis, given our view that the market need not

fear a (small) change in government policy direction. Our short-

term fair value model estimate has broadly tracked around

USD0.72-0.73 since the election, supported by high risk appetite.

This compares to current spot levels at sub USD0.70. A fading of

the NZ political risk premium supports a closing of the valuation

gap over the near-term and a broadly based recovery on most

crosses. Next week’s RBNZ MPS should be NZD-supportive as

the Bank lifts its inflation forecasts. We see no need to change

Contents

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2 November 2017 Strategist

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Slump in confidence does not portend slump

in activity

Though growth likely to undershoot RBNZ and

Treasury assumptions

Inflationary pressures are building

Corporate profit margins under pressure

Debt programme likely bigger than Government

forecasts

Businesses and financial markets don’t like Labour-led

Governments. You can make your own judgments as to

why this might be so but the evidence is there for all to

see. It is perhaps best revealed in the confidence

indicators. Take, for example, the ANZ’s Business

Outlook. This survey clearly shows that businesses

overstate the likely strength in activity during the reign of

National-led governments and underestimate likely activity

under Labour.

And then there’s the currency. You’d be hard-pressed to

conclude that it’s always weaker under Labour but, equally,

you can’t ignore the fact that the NZD weakened

considerably as the prospect of a Labour government grew.

It is perhaps not surprising that businesses feel more

uncomfortable under a Labour-led regime. After all,

Labour parties the world over are focused on redistributive

policies which often favour the providers of labour over

the owners of capital. In this regard, this Labour

government is no different particularly with regard to its

labour market policy concentration on raising the wages

of the lowest paid.

We have thus seen business confidence drop

aggressively from a net 44% (seasonally adjusted)

expecting an improvement in own-activity in August to

just 24% thinking likewise in October. This was the lowest

level reported since February 2016. If history is anything to

go by, we would expect a further sharp drop when we get

the November reading.

Typically, movements in confidence are a good leading

indicator of GDP and such a large drop as we are currently

in the midst of would have us scurrying to slash our

growth, inflation and interest rate forecasts. But, in this

case, we will do nothing of the sort. Instead, we will, at

least in the first instance, assume that this is the “normal”

sort of reset that you would expect when a New Zealand

leadership moves from blue to red. Certainly the shift will

have a negative short-term impact on investment and if

the current decline developed into a more medium term

trend we would reassess but, for the time being, we will

remain guardedly optimistic that a combination of current

economic momentum and stimulatory economic settings

will see us through.

We are not convinced that financial markets understand

this New Zealand idiosyncrasy. Already there are those

noting the drop in confidence and using it as justification

for the RBNZ leaving interest rates on hold forever. We

believe this is an inappropriate way to view these shifts in

confidence at this juncture.

We also believe investors are making the wrong judgment

calls around:

– expectations that the incoming government will

change the Reserve Bank Act; and

– that it will slash net immigration.

Many believe changes to the Reserve Bank Act and/or

Policy Targets Agreement will mean interest rates will be

lower than would otherwise be the case. This is largely

due to the fact that an employment target – of sorts – will

be included alongside the Reserve Bank’s inflation target.

Yet there is no evidence to support the conclusion that

the Bank would be more dovish under that arrangement.

Indeed, from an economic sustainability perspective, the

tightening labour market, as evidenced by yesterday’s

labour market report, is probably of more concern than are

any immediate inflationary pressures.

As for migration . . . yes, it looks very likely that net

migration will fall faster than we had built into our

forecasts. In part this will be due to Labour’s differing

migration focus but, actually, recent data have been

showing that net migration was coming under pressure of

its own accord in part because Kiwis are resuming their

offshore pursuits as the rest of the world looks

increasingly economically attractive.

Most importantly, you need to look at the impact of

migration flows in a supply context not just a demand

context. Many see lower migration leading to lower

Markets Too Focussed on Downside Risks

Helped by inventories and net exports

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

-40

-30

-20

-10

0

10

20

30

40

50

60

70

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Annual% change

Net %expecting

increase (s.a.)

Monthly

Business Expectations and GDP

Source: Statistics NZ, BNZ, ANZ

Own-activity expectations(advanced 6 months)Real GDP (rhs)

BNZForecasts

NATIONAL LABOUR NATIONAL

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growth, lower inflation, and lower interest rates in the

same manner that declining business confidence might.

But what we have learnt from the recent migration cycle is

that the supply impact outweighed the demand impact on

inflation. It was this that initially caught forecasters out as

the migration-demand-driven pick up didn’t generate the

inflation that was anticipated. If the relationship is

maintained when net migration falls then it would be

reasonable to assume that if the supply side impacts

again dominate (via the labour market) then inflation will

be higher, not lower, than would otherwise have been the

case. It doesn’t seem to us that the market is willing to

contemplate this scenario.

More generally, we have had a go at recasting our forecasts

based on the information that we currently have on likely new

policies. This should be considered as work in progress and

our forecasts will evolve as we get more detail.

As we had anticipated pre-election our major conclusions

are:

– our growth expectations are largely unchanged

though its composition may change;

– inflation is modestly higher;

– government debt will be higher;

– there will be some initial pressure on corporate

margins as inputs costs rise.

We are forecasting the economy to expand 2.8% in each

of calendar 2018 and calendar 2019. In aggregate this is

unchanged from our previous forecast. However, we

acknowledge that the pattern of private consumption is

changed to the extent that: net migration is expected to

be lower; the tax cuts have gone; and changes to Working

for Families and other benefit payments are delayed to

July 1 from April 1. And while migration and the overall

tax/benefit package will reduce the total level of private

consumption, the impact of this will probably be offset by

higher minimum wages and the more redistributive nature

of Labour’s policies which will see effective transfers from

those with a lower propensity to consume to those with a

higher propensity to consume.

Our investment profile has similarly remained broadly

unchanged in aggregate. Short term, business investment

is hit by uncertainty but resumes normal transmission

thereafter albeit with some downside risk. There is some

upside risk to housing investment, assuming that the

government is able to build the houses that it wants to

build, though the increased risk on this front is largely

offset by downside from lower population growth. In

effect this becomes a switch from household to

government investment – a switch that may well be

repeated in other areas of capital formation.

We note that our growth forecasts were already well

below those of the central bank and Treasury. If we are

right, the RBNZ will have to decide whether this is

disinflationary (via the demand channel) or inflationary via

Migration Eases

NZ Keeps on Keeping On

-20

-10

0

10

20

30

40

50

60

70

80

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 22

Annual% change

Quarterly

Migration and Working Age Population

Working Age Population (rhs)

Net Immigration

Net Migration(annual, 000s)

Source: Statistics NZ, BNZ

Forecasts

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

% change

Quarterly

Gross Domestic Product

Source: BNZ, Statistics NZ

Annual average Annual

Forecasts

Growth Expectations Compared

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2018 2019 2020

GDP Growth Forecasts

BNZ

RBNZ

Treasury

Source: BNZ, Treasury, RBNZMarch Years

Inflation At Target

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Annual % change Consumers Price Index

RBNZAug MPS

BNZ

Source: RBNZ, Statistics NZ, BNZ

Target low

Quarterly

Target peak

Forecasts

Target mid-point

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the supply channel. For the record, the RBNZ’s August

MPS published GDP track was 3.1% for the year ended

March 2018; followed by 3.6% in 2019 and 2.9% in 2020.

Our equivalents are 2.5%, 3.0% and 2.5%. Treasury has

assumed 3.4%, 3.8% and 3.1% over the same period. If

we are correct then there is clearly downside risk to

government revenues which will be problematic for the

government’s expenditure plans.

Our growth forecasts might be unchanged but our

inflation forecasts are definitely higher such that we have

annual CPI now quickly moving to 2.0% and staying there

or thereabouts for the foreseeable future.

We should note that some of the revision is due to the

sharp drop we have witnessed in the New Zealand Dollar.

This will flow through directly into the CPI over the next

eighteen months but will also have lasting indirect

impacts to the extent that higher inflation feeds through

into higher inflation expectations which, in turn, impacts

future inflation.

Additionally, we have lowered our unemployment rate

forecasts in part due to yesterday’s labour market data.

This results in upward pressure on labour costs especially

when coupled with reduced future labour supply.

But there are also specific policies that will be introduced

that will have some impact on future inflation:

–

– the 26% increase in the minimum wage should

push overall labour costs higher;

– increased house building will increase building

costs in a capacity constrained industry;

– tighter rental property rules will edge rents

higher;

– the 10c/l petrol tax for Auckland equates to

around a 3c/l average increase across the country

which will feed directly into the CPI.

There will be CPI offsets, nonetheless. Free tertiary

education will have a big impact. There will be some

impact of the provision of free health care for all those

under 14 (currently 13) and the annual free doctor’s visit

for the elderly. There will no doubt also be further super

gold card benefits.

Putting all this together, we still see higher inflation

despite our below-consensus growth expectations.

We have not changed our interest rate views largely

because we already have a RBNZ tightening track that is

miles ahead of the RBNZ’s stated view and modestly

ahead of market. But we are feeling increasingly

comfortable with our expectation that the first rate hike is

August 2018 followed by a further hike in November.

Unemployment Slumps

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

% (s.a.) Unemployment Rate

Source: BNZ, Statistics NZ, RBNZ Quarterly

Forecasts

RBNZ August

2017 MPS

BNZ

Non-inflationary Rate ?

Minimum Wage Impacts

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

07 08 09 10 11 12 13 14 15 16 17 18 19 20

Labour Cost Index

Forecasts

BNZ

RBNZ*

Annual %change

* interpolated from RBNZ annual observations

March YearsSource: Statistics New Zealand, RBNZ, BNZ

Rates Headed Higher

0

1

2

3

4

5

6

7

8

9

10

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

%

Quarterly Average

Cash Rate

Source: RBNZ, BNZ

Forecasts

BNZ

August 2017 RBNZ MPS

More Debt

0

5

10

15

20

25

30

09 10 11 12 13 14 15 16 17 18 19 20 21 22

% of GDP

June Years

Government Net Debt

Source: BNZ, Treasury

PREFU 2017

Labour Government

Forecasts

?

?

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We also continue to believe that longer dated yields are

headed higher and sooner than the cash rate as:

expectations for a hike increase; inflationary pressures

rise; global interest rates push higher; and the

government issues an increasing amount of debt.

For the time being, we will run with Labour’s stated bond

tender programme which is, over the next four years,

$7bn higher than National’s forecasts. But we caution that

Labour will struggle to keep within the spending

framework that it has allowed itself and its revenue is

likely to be threatened by economic growth weaker than

the Pre-Election Fiscal Update presumed. Accordingly, a

bond tender programme substantially higher than

suggested appears likely to us.

Our broader currency views are also unchanged as we

maintain that offshore developments and New Zealand’s

relative growth prognosis will dominate. Nonetheless, we

have had to moderate our currency track to accommodate

a lower starting point.

In summary then, we are very strongly of the view that the

New Zealand economy will keep on keeping on post the

change in government but we cannot stress enough that

market participants must be more wary of the inflationary

pressures that are developing than the negative

confidence impact on activity.

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major correction soon. Final sales of domestic product,

which exclude inventories, grew by a solid 0.6% qoq,

despite residential investment and public demand continuing

their recent soft patch.

Upbeat FOMC keeps tightening in view

US Q3 GDP does well in spite of hurricanes

While inflation remains subdued

The US FOMC Statement overnight was boilerplate,

making very little change of substance to the prior

statement in September. The Fed upgraded its

characterisation of growth from ‘moderate pace’ to ‘solid

pace,’ despite the hurricanes, with rising business

investment and moderate household demand. The latter

perhaps in recognition of slower personal consumption

within the preliminary Q3 GDP release last week (see

below for more details on this) and yet strong readings on

income/spending and consumer confidence surveys.

While there was no notable shift in language to suggest

the Fed is becoming any more uncomfortable with

inflation’s failure to rise, it did add that outside of higher

gasoline prices following the hurricanes, ‘inflation for

items other than food and energy remained soft.’ The

Fed now says ‘both’ annual inflation measures have

declined this year (core PCE and CPI) and are running

below the 2% target. The Committee retains its line

however, that ‘inflation on a 12-month basis is expected to

remain somewhat below 2% in the near-term but to

stabilize around the Committee’s 2% objective over the

medium-term.’

The Fed repeated that ‘near-term risks to the economic

outlook appear roughly balanced, but the Committee is

monitoring inflation developments closely.’ With the

FOMC still believing lower inflation is temporary, it

continues to expect with gradual adjustments in the

stance of monetary policy, economic activity will expand

at a moderate pace, while labour market conditions will

strengthen further. Markets showed a muted reaction, but

accorded with the view, the Fed remains on course to

raise rates again in December.

Another strong quarter of growth

US GDP grew by 0.7% qoq, or 3.0% on an annualised basis,

in the September quarter 2017. This was despite the major

hurricanes that occurred during the quarter. The annual

growth rate (September 2017 on September 2016) was the

strongest in 2 years at 2.3% yoy. That said, this rate of

growth is only marginally higher than the post-GFC average

and by historical standards growth remains moderate.

The composition of growth was reasonable too. While

softening, consumption and business investment growth

remained solid, while there were higher contributions to

growth from net exports and inventories. The inventory

contribution reflected a return to a more normal level of

inventory accumulation, so there is no reason to suspect a

Real consumer spending grew by 0.6% qoq, below the

previous quarter’s 0.8% pace. However, it is still a solid

result, particularly given the initial impact on the monthly

consumption data from Hurricane Harvey. The quarterly

outcome suggests consumption bounced back in the

September month despite another severe hurricane hitting

Florida. Utilities consumption fell in the quarter; normally

this would reflect seasonally mild weather but in this case

it is likely the result of widespread power outages from

the hurricanes. This component alone explains around half

the 0.2ppt reduction in growth from the previous quarter.

Business fixed investment increased for the sixth

consecutive quarter. Growth in equipment investment

was again strong while intellectual property investment

(which includes research) was robust. In contrast non-

residential structures investment fell, as the recent

strength in mining sector investment moderated and the

weakness in other structures investment persisted. Since

mid- 2016, mining structures investment has risen by

more than 75%, but the easing in the rig count early in the

December quarter suggests this has run out of steam.

In contrast to overall business investment, residential

investment has hit a soft patch, falling in the last two

quarters. The hurricanes may explain some of the

September quarter weakness but it almost certainly not

the only factor. Nevertheless, repairs and re- construction

Onwards and Upwards for US Economy and FOMC

Quarterly GDP growth stayed strong in Q3

Helped by inventories and net exports

Contributions to quarterly GDP growth (ppts)

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in hurricane affected areas might provide a boost to the

sector in coming months.

The stronger contribution from net exports was driven by

a fall in real goods and services imports. Exports grew a

decent 0.6% qoq, but this was a bit weaker than the

average over the previous year. In the September quarter,

the US dollar (measured by the Fed’s Broad Dollar Index),

was only a little lower than a year ago, so it is hard to

explain why import growth would be so sluggish when the

US economy is traveling well. Hurricane activity also

disrupted some ports, so it may be that the trade data has

been depressed temporarily.

As expected, given the monthly data released to date,

annual headline personal consumption expenditure (PCE)

inflation moderated further from 1.6% yoy in the June

quarter 2017 to 1.5% yoy in the September quarter. The

core inflation measure, which excludes energy and food,

slowed from 1.5% to 1.3%yoy.

Assessment

The strength in September quarter was the more

impressive for occurring despite significant hurricane

disruptions. As it was stronger than we had expected, our

forecast for 2017 has been revised up to 2.2% (from

2.1%). However, it doesn’t fundamentally alter our view of

the economy and we have maintained our forecast of

2.3% for 2018.

It is worth remembering that GDP is quite volatile on a

quarter-to-quarter basis. In particular, the weakness in

March quarter GDP was discounted on the basis that it

might reflect seasonal adjustment issues. If true, then this

would mean that growth would be artificially high in the

rest of the year.

Our view is that the US economy is growing at an above

trend level which should lead to further a decline in the

unemployment rate from its already low level, providing

some added inflationary pressures over time.

The main takeaway from the Q3 GDP result is additional

support for this view. Importantly, given the statistical

volatility noted above, it is also supported by independent

data sources – business survey measures are at solid

levels and consumer confidence remains relatively high.

One issue that bears close watching is the downwards

movement in the savings rate, although the rate of decline

has slowed recently. The savings rate is at its lowest level

since 2007 and there is some limit as to how far it can fall.

One possible reason for the decline is that, with

confidence high and balance sheets (on average) in good

shape, households have been unwinding the increase in

savings that followed the GFC.

At the margin, the strong growth in September quarter

GDP adds to the likelihood of the Fed raising rates in its

December meeting (the chance of any change in policy at

this week’s meeting looks remote). One reason that the

Fed has not materially changed its outlook for the fed

funds rate over this year in the face of weakening inflation

is that it sees future inflationary pressure from the

continuing falls in the unemployment rate, a trend the

strong Q3 GDP report suggests will continue.

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Inflation slowing despite robust growth

Q3 GDP result broadly consistent with surveys

Savings rate still declining

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Brent Crude Oil rises to over US$60 for the first time

since July 2015

Prices are supported by falling US inventories and

signs that OPEC will extend current production

limits beyond Mar 2018

NZ diesel prices are at 3 year highs as both currency

and energy prices add support

Crude oil prices have risen to the highest levels in over 2

years, responding to ongoing tightening of US and global

supply. While this is driving up near term spot prices, the

forward curve remains in steep backwardation (US$5

discount) out to 2020, as producers take the opportunity

to lock in long term hedges. Recent US inventory data

shows Crude supplies at the lowest levels since 2016

while refined products are also well off the highs seen

earlier this year.

OPEC will meet in Vienna later this month, and

expectations are high that they will extend the current

production agreement into late 2018. The goal of the

cartel is to force global inventories back towards long run

averages, and provide a long term price floor at

US$60/barrel. Current compliance to agreed production

curbs is running high at 92% and is likely to increase from

involuntary supply disruptions in Venezuela (US trade

sanctions/infrastructure), Nigeria, Libya, and Iraq.

NZ spot Diesel prices have risen to 3 year highs

responding to both the higher $US price and weakness in

NZD/USD since the election. As mentioned in the previous

report, the upside break of 59c/l signals a long term

technical target of 90 c/l. Consumers who need to hedge

should target pullbacks towards 60 c/l while taking

advantage of the favourable forward curve.

Breakout

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Carbon and Commodities

Commodity US$

Change

(daily US$)

Change

(Fortnight)

Change

(Month)

Change

(Year)

Brent Crude 60.50 0.01 5.71% 6.14% 16.84%

WTI Crude 54.26 -0.04 5.79% 6.83% 6.71%

Copper 6,906 84.01 -3.04% 6.89% 43.63%

Zinc 3,318 8.52 2.77% 1.86% 42.50%

Aluminium 2,173 26.57 2.96% 4.16% 31.23%

Tin 19,510 35.06 -5.63% -6.29% -1.46%

Nickel 12,757 515.52 8.06% 23.62% 20.42%

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Domestic political forces have seen the NZD

underperform since the election across a broad

range of currencies. We see the NZD as oversold on

this basis, given our view that the market need not

fear a (small) change in government policy direction.

Our short-term fair value model estimate has

broadly tracked around USD0.72-0.73 since the

election, supported by high risk appetite. A fading

of the NZ political risk premium supports a closing

of the valuation gap over the near-term and a

broadly based recovery on most crosses.

Next week's RBNZ MPS should be NZD-supportive

as the Bank lifts its inflation forecasts. The Bank

might not yet be willing to admit a tightening bias,

but the direction of change in view should be clear.

The NZD has come under significant downward pressure

since the 23 September general election and took another

leg down after NZ First Leader Peters announced that he

chose to be part of a centre-left Labour-led government.

Since the election the TWI has fallen by about 4½%. The

fall has been broadly based. Out of a subset of 32 major

global currencies, the NZD has fallen against 30 of them

since the election, with only the Turkish Lira and Mexican

Peso underperforming the hapless NZD.

We are surprised that the NZD has fallen so much and so

broadly, particularly considering that the final outcome

was half-expected. Going into the election we expected

any domestic political forces on the NZD to be transitory

and that remains our view. In other words, we see the

NZD as oversold on domestic political forces.

The market is taking the view that NZ is about to take a

giant step backwards, create a more investor unfriendly

environment, fall into a growth hole as immigration is

scaled back and the housing market takes a hit, and

interest rates to be set lower than otherwise against a

backdrop of reform of the RBNZ Act.

We don’t buy into the view that a major change in

economic direction is upon us. The night he chose

Labour to form a government, Deputy PM Peter’s speech

talked of fighting capitalism. That’s scary sounding at

face value, but for all the talk about a significant change in

economic direction the reality is that we’ll likely see only a

minor shift, in our view. This week’s ban of foreigners

buying existing NZ homes should be seen in this light – a

modest tweak with likely limited overall economic impact.

The government could have easily gone down the route of

more widespread foreign bans on investment, threatening

trade agreements in the process, but it chose a fairly

innocuous path.

Fears about the impact of the reform of the RBNZ Act

seem overdone as well. The fall in short-term interest

rates against a backdrop of higher inflation expectations

(as measured by market-implied break even rates on

inflation-linked bonds) is puzzling to us. Lower NZ-global

short term real interest rate spreads have been one factor

in the post-election fall in the NZD.

Any changes to the RBNZ Act are likely to be a long way

off as it will involve a lot of work to incorporate all the

changes that are desired, including reducing the

Governor’s sole decision-making powers, incorporating

macro-prudential policy and financial stability into the mix,

and upping the focus on employment in pursuing the

price stability objective.

At the moment, much of this is recorded within the

confines of the Policy Targets Agreement. Mooted

changes will result in an improved legal framework and

from a political perspective will be seen as popular, but

we don’t see the changes materially altering the RBNZ’s

policy reaction function.

It’s early days, but the NZ TWI appears to have found a floor

over the past week, perhaps suggesting that selling

pressure seen post-election is drawing to a close. Our

working assumption remains that the NZD over-reacted to

domestic political change and this force will fade over time,

particularly as more details on policy are released and the

market gets more comfortable with the new government.

Our short-term fair value model estimate has broadly

tracked around 0.72-0.73 since the election, nudged ever

so slightly lower over the last few weeks by softer NZ

commodity prices against a backdrop of very high risk

appetite. A fading of the NZ political risk premium

supports a closing of the valuation gap over the near-term

and a broadly based recovery on most crosses.

Last fortnight we mentioned that our forecasts were

“under-review”. After thinking long and hard about

NZD short-term oversold

NZD Takes a Hit Post-Election

70

72

74

76

78

80

Jan-16 Jul-16 Jan-17 Jul-17

NZ TWI

Source: BNZ, Bloomberg

NZ Election

bnz.co.nz/research


Page 10

whether we should be changing our NZD forecasts post-

election, we have decided against any knee-jerk reaction.

It is not a particularly tidy exchange rate story we have to

tell, given divergent forces. The current global backdrop

is positive for the NZD, with strong global economic

momentum, high levels of risk appetite and rising global

commodity prices. To the extent that these conditions

remain, they are a tailwind for the NZD. We’ve long been

expecting a fall in risk appetite as these global conditions

eventually fade, but it is fair to say that the extent of the

global economic recovery has surprised to the upside over

the past 3-6 months. An NZD-unfriendly fall in risk

appetite feels inevitable at some stage, but timing

remains elusive and the risk of that now feels more like an

event for some time next year.

Into the mix, we have some idiosyncratic NZ commodity

price weakness upon us, going against the positive global

trend. Dairy prices have fallen recently, and further

downside could be on the cards, particularly for fats and

skim-milk. This limits the scope for any NZD recovery and

in fact can be currently considered a headwind.

Meanwhile, a fading domestic political risk premium is

expected to act as a tailwind for the NZD.

Putting it all together, we have no great urge to change

our NZD projections, which have the currency anchored

around USD 0.69-0.70 through the next 12 months.

One factor that might aid the NZD over the short term is

relative monetary policy. A December Fed hike is

currently well priced by the market (around 90%). Pricing

of local rates implies that the market sees the RBNZ

tightening cycle pushed out since the election. We

disagree with that conclusion.

With portfolio flows driving recent NZD weakness, the

RBNZ will be obliged to see the weaker currency as an

inflationary force when it releases its new set of forecasts

next Thursday. The overwhelming weight of evidence

since the RBNZ’s August MPS points to higher inflationary

pressure. These factors include the higher than expected

Q3 CPI result (a 0.3% higher starting point that the Bank

will have to consider), a much weaker NZD driven largely

by portfolio flows, higher oil prices, the leap in minimum

wages the government has guided towards (average 6%

pa over the next few years), and likely easier fiscal policy

under the new government.

Against those inflationary forces, the Bank will have to

consider things like what sort of weaker housing market and

growth pothole the economy might see over the short-term.

The net result should see the RBNZ revise up its inflation

projections and bring forward the projected first rate hike

for the cycle (previously late-2019). A slightly more

hawkish tone from the Bank could help underpin a modest

bounce-back in the NZD over the short term.

[email protected]

NZD Oversold Post Election

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

2004 2006 2008 2010 2012 2014 2016


NZD/USD

Model Estimate


NZD/USD

Model Estimate

NZ Dairy Prices Falling Against Global Commodity Trend

70

74

78

82

86

90

1400

1900

2400

2900

3400

Jan-16 Jul-16 Jan-17 Jul-17

Weighted Whole & Skim Milk Powder (lhs)

BBG Global Commodity Prices (rhs)

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Page 11

NZ rate hikes have been pushed out after the new government was formed, with the first full hike a few months later now in

February 2019. The market thinks that the RBNZ will be more tolerant of higher inflation under proposed reforms to the

RBNZ Act and/or growth might hit a pothole. We disagree with this logic. Inflationary pressures will likely be higher under

the new government's policies and this week's labour market data pointed in the direction of higher inflation pressure as well.

The Fed's update this morning had little impact on market pricing, with a December rate hike close to 90% priced and about

another 1½ rate hikes priced in through 2018.

At its meeting tonight, the BoE is widely anticipated to raise its policy rate by 25bps for the first time in a decade, with the

next hike not priced until the second half of next year.

jason.k.wong @bnz.co.nz

New Zealand United States

Australia Eurozone

United Kingdom

Cross Country

The BNZ OIS-ter: NZ hikes pushed out post govt. formation

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

Current

19-Oct

Source: Bloomberg

%

Market Expectations

Market expectations (from OIS rates)

Expectations for RBNZ Cash Rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Jan 20

Current

19-Oct

Source: Bloomberg

%

MarketExpectations

Market expectations (from Fed Fund Futures)

Expectations for Fed Funds Rate

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Current

19-Oct

Source: Bloomberg

%

MarketExpectations


Expectations for BoE Cash Rate

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

NZ (curr) AU (curr) US (curr)

EU (curr) UK (curr)Source: Bloomberg

%

Market Expectations

Market Expectations (from OIS and FFR)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

5-Feb-13 4-Jun-14 7-Oct-15 8-Feb-17 6-Jun-18

Current

19-Oct

Source: Bloomberg

%

MarketExpectations


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 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Current

19-Oct

Source: Bloomberg

%

MarketExpectations


Expectations for ECB Cash Rate

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Page 12

Front end rally excessive on political headlines.

Look for NZ 2y swap to track 2.10-2.30% range

Maintain curve steepening bias, 5s too rich on swap

curve against 2s and 10s.

Are longs in NZ front end rates jumping at shadows?

Since the election, the NZ 2y rate is down 4bp to 2.16%

and the OIS curve has pushed the timing of the first 25bp

RBNZ hike to February 2019 from November 2018. Moves

in the NZD were much larger, which looks at least partly

down to long positioning in NZ rates. This seems to

mostly reflect offshore receiving of NZ swap for the

favourable carry.

A key reason for the rally is the new Government’s potential

changes to the RBNZ PTA. This will take a long time to

implement and as BNZ economists have outlined, the

change doesn’t necessarily suggest any less pre-disposition

for the RBNZ to hike. Our view is that the broader policy

mix, while uncertain, seems unlikely to herald a major

change for the NZ growth trajectory, while adding some

upside to the inflation outlook.

To drive a further rally, news flow will need to keep

generating the kind of economic confidence sapping

headlines the market is seemingly positioned for. We

suspect longs will be disappointed on this front. In addition,

the coalition government’s broad policy suite is inflationary

and the NZD has fallen sharply. The RBNZ will likely have to

deal with this aspect in their forecasts. It may be too soon

to see major changes to the OCR track at next week’s MPS.

But along with other data such as the latest jobs report, the

balance of risks is pointing to a tighter labour market and

upside risks to the inflation outlook.

We suspect the politics related receiving theme will run

out of legs as a driver of the NZ front end rally. Our bias is

for a constrained sell-off in the front end and for 2y swap

to sustain a 2.10-30% range.

[email protected]

Interest Rate Strategy:

Chart 1: NZ 2y swap

Chart 2: US 10y vs NZ 2s10s swap curve

Chart 3: 2s5s10s swap

Chart 4: NZ Swap PCA Model

bnz.co.nz/research


Page 13

Coalition Announced – 19 October

A Labour-NZ First coalition government is announced in

the early evening by NZ First leader Winston Peters. The

Greens will support the government in confidence and

supply. There was no discussion of policy detail from the

coalition negotiations.

Int’l Travel and Migration (Sep) – 20 October

Net migrant inflows have eased. Sure, at +5,190 in

September (seasonally adjusted) net inward migration was

still extremely high. However, it has now moderated for

three consecutive months, from a high point of +6,300

back in June. This before anything the new government

engineers in trying to temper the inflow. The fall in the net

number is the result of falling arrivals (5% y/y) and rising

departures (+14% y/y). This is likely related to a recently

strengthening Australian job market. This all suggests there

is a better chance of this being a true turning point in NZ

immigration. For short-term visitor arrivals in September, the

3% y/y gain proved a little better than the flat result we

pondered. Tourism growth continues.

Coalition Agreement Signed – 24 October

Labour-NZ First coalition agreement signed and released.

Likewise a Labour and Green confidence and supply

agreement. Broad policy direction confirmed, but detail

still to be fleshed out.

Merchandise Trade (Sep) – 26 October

The September merchandise trade deficit of $1,143m was

larger than the $900m deficit expected by the market

although not as wide as the $1,360m we had pencilled in.

Exports were 9.0% higher than a year earlier, while

imports were up 1.4%. It was enough to see the annual

trade deficit continue to shrink, reducing to $2,908m in

the year to September from $3,154m in the year to

August. Some further narrowing is anticipated near term,

before an expected change of direction through 2018.

New Residential Lending (Sep) – 26 October

September’s new residential lending by local banks was

down 21.7% on a year ago. This was little surprise given it

was election month, and was about the average rate of

annual decline over the past six months. Upcoming

summer/autumn data will give a more trusted indication of

where we’re really at with the housing market.

Retail Sales Revision (Q2) – 30 October

Statistics NZ corrected an error in previously published Q2

retail sales. The upshot is a downward revision to Q2

volume growth to +1.7% from the +2.0% originally

published. SNZ said there will be no significant impact on

Q2 GDP.

Building Consents (Sep) – 31 October

September’s new dwelling consents dipped a seasonally

adjusted 2.3% from August, but this actually shores up the

impression that consents are trending higher. In effect, it

was only a small correction after gains in July and August of

3.2% and 5.9% respectively. Consents are 6% higher than a

year ago. This is quite encouraging especially given

prevailing election uncertainty. Meanwhile, the trend in the

value of non-residential building consents is swinging up

even more aggressively – and up 10% on a year ago for the

September quarter as a whole.

ANZ Business Survey (Oct) – 31 October

Business confidence wobbled in this October survey

conducted after election night, but before the change of

government was announced. Confidence fell to -10 from

zero, while activity expectations eased to +22 from +30.

The declines are that much starker in seasonally adjusted

terms. Further declines in November would not surprise.

Inflation indicators edged marginally lower: inflation

expectations to 1.9% from 2.0% and pricing intentions

+20.2 from +21.1.

Credit Aggregates (Sep) – 31 October

Annual growth in household credit slowed further to 6.6%

in September from 6.9% in August. But the month to

month seasonally adjusted progression of +0.5% in

September - from +0.4% in August and +0.3% in July -

suggests growth is stabilising at a not too bad a rate, even

in the face of election uncertainty. Meanwhile, consumer

lending has accelerated to 7.2% y/y, business credit is

running at 5.5% y/y and agriculture at 2.6%.

NZ Economic Review

Starting To Fall

-40

-20

0

20

40

60

80

100

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Net inflow (000s)

Monthly

Net Immigration

Source: Statistics New Zealand, BNZ

Annual running total

Mthly SA Annualised

Building Up

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Number

Monthly

Trend Dwelling Consents

Source: Statistics NZ, BNZ

Houses

Total (including apartments, retirement units and townhouses)

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Page 14

Labour Market Reports (Q3) – 1 November

The 2.2% surge in official Q3 employment was simply too

strong to believe as a gauge to underlying growth. But the

over-riding conclusion from this suite of data is that the

labour market is tightening. This is best illustrated by the

unemployment rate edging down to 4.6%, from 4.7%,

despite strong net migration and the participation rate

powering up to a record high of 71.1%. While upside risk

to wage inflation is mounting, increases to date are

limited. To be sure, annual inflation in the private sector

Labour Cost Index rose to 1.9% in Q3, from 1.6%, but all

of this pick up is attributed to the care and support

workers’ pay equity settlement.

QVNZ Housing Report (Oct) – 2 November

Annual house price inflation continues to slow, reaching

3.9% in September from 4.3% in August and 12.7% a

year ago. Auckland house prices have dipped below year

earlier levels on this measure with annual inflation of -

0.6%. No surprises here. More interest will be in the

months ahead as the market contemplates the effects of

likely lower net migration, restrictions on foreign buyers of

existing houses, and more building.

ANZ Job Ads (Oct) – 2 November

Underscoring the buoyancy of labour demand, job ads

managed to rise a further 0.9% in October following gains

of 0.4% in September and 1.1% in August. This, despite

political uncertainty as indicated in business confidence. It

supports our view that the unemployment rate will

continue to push lower.

[email protected]

Tightening

2

3

4

5

6

7

8

9

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

%

Unemployment Rate

Source: BNZ, Statistics NZ Quarterly

Trend

Seasonally adjusted

Non-inflationary Rate ?

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Page 15

ANZ Commodity Export Prices (Oct) – 6 November

We look for a dip of around 1% in the world index of NZ’s

major export product prices for October. However, we

look for a gain of a similar magnitude when prices are

expressed in NZ dollars thanks to a NZD slump.

RBNZ Survey of Expectations (Q4) – 6 November

This survey has lost a bit of its mojo having recently been

labelled as ‘unreliable’ by the RBNZ. However, it will still

be interesting to see if there is any noticeable shift in

surveyed inflation expectations immediately post

government formation and NZD drop. Two year ahead

annual CPI inflation expectations stood at 2.09% in Q3.

Crown Financial Statements (Sep) – 7 November

These, three-months-to-September, figures are the first

look at the Crown accounts for the new 2017/18 financial

year following the $4.1b operating surplus recorded for

the previous financial year. Will revenues still be running

stronger than budget, and expenses lower?

GDT Dairy Auction – 8 November

Current indicators point to a clear price decline at this

auction. Prices are expected to be led lower by skimmilk

powder as concern around possible changes to the EU

intervention scheme weighs. We also expect a pullback in

fat prices from recent highs. It all would add to downward

pressure on Fonterra’s milk price forecast.

RBNZ Monetary Policy Statement – 9 November

The chance of the OCR changing at this meeting, from its

current 1.75%, is as close to zero as you can get. But

there will be heaps of interest in the RBNZ’s commentary

and projected interest rate track. The Reserve Bank is still

fundamentally in a holding pattern at present, but will

need to take account of recent inflation positive

developments including a higher than expected starting

point for inflation, a much lower than anticipated NZD, a

tighter than forecast labour market and prospect of higher

minimum wages ahead, more fiscal stimulus, and

improvement in the global economic backdrop. On the

negative side, business confidence has fallen and the

housing market looks a touch softer than the Bank had

forecast. On balance, it is almost certain the RBNZ will

revise up its inflation track. What is less certain is what it

will do with its interest rate track (that was flat out to late

2019 before edging higher in the August MPS) as this will

depend on the Bank’s judgement as to the permanence of

the above inflationary pressures. In any case, we believe

that there is very little chance the Bank will be more

dovish than it was in August and it may well be noticeably

more hawkish. As for the press conference, no doubt

there will be lots of questions on what potential changes

to the RBNZ Act and/or Policy Targets Agreement might

mean for monetary policy ahead. But we do not expect

any decisive answers on this from the Bank ahead of the

government review that will take some time to complete.

Electronic Card Transactions (Oct) – 10 November

September’s electronic card transactions surprised us by

easing 0.1%. The election might have injected some

spending caution or perhaps it was the issue of the school

holidays beginning in early October this year, as opposed

to late September last year. The latter could see a decent

lift in October, while political uncertainty may keep

spending growth in check. On balance, we look for a 0.4%

increase in total transactions in October. Any deviation

from this would have implications for the rather limited

growth we see for retail sales volumes for Q4, after what

looks like hefty decline in Q3 (as unwind from the Lions

Rugby tour and World Masters Games Q2 bonanza).

Ready Mixed Concrete (Q3) – 16 November

Q3 concrete production will give an early guide to whether

the wider construction sector is tooling up again after a

siesta in the first half of the year.

ANZ-RM Consumer Confidence (Nov) – 16 November

This survey will be analysed for consumers’ initial

judgement on the new government. Not that there was

any obvious nervousness in the lead up to the election, or

during the negotiations, with consumer confidence

tracking a high road of 126.2, 129.9 and 126.2 through

August, September and October respectively.

[email protected]

NZ Upcoming Data/Events

On The High Road

80

90

100

110

120

130

140

150

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

ANZ Roy Morgan Consumer Confidence

Seasonally adjusted

Actual

Source: Westpac, McDermott Miller, ANZ, Roy Morgan Monthly

Index

bnz.co.nz/research


Page 16

Quarterly Forecasts

As at 2 November 2017

Key Economic Forecasts

Quarterly % change unless otherwise specified Forecasts

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

GDP (production s.a.) 0.8 0.7 0.4 0.6 0.8 0.7 0.5 0.4 0.8 1.1

Retail trade (real s.a.) 2.1 0.8 0.9 1.6 1.7 -1.0 0.6 0.7 0.7 1.3

Current account (ytd, % GDP) -2.7 -2.8 -2.5 -2.9 -2.8 -2.6 -2.4 -2.3 -2.6 -2.9

CPI (q/q) 0.4 0.3 0.4 1.0 0.0 0.5 0.6 0.6 0.4 0.6

Employment 2.5 1.2 0.8 1.2 -0.1 2.2 0.4 0.6 0.5 0.5

Unemployment rate % 5.0 4.9 5.3 4.9 4.8 4.6 4.5 4.4 4.4 4.3

Avg hourly earnings (ann %) 2.1 1.6 1.1 1.1 1.2 2.0 2.7 2.8 2.6 2.4

Trading partner GDP (ann %) 3.4 3.2 3.5 3.5 3.5 3.7 3.5 3.6 3.5 3.5

CPI (y/y) 0.4 0.4 1.3 2.2 1.7 1.9 2.1 1.6 2.0 2.2

GDP (production s.a., y/y)) 3.5 3.3 2.6 2.5 2.5 2.5 2.6 2.5 2.5 2.9

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

2016 Sep 2.10 2.30 1.95 2.25 2.05 2.15 2.50 0.80 1.55 0.70

Dec 1.85 2.10 2.45 2.95 2.25 2.65 3.10 0.90 2.10 0.80

2017 Mar 1.75 2.00 2.70 3.25 2.35 3.00 3.50 1.15 2.50 0.80

Jun 1.75 1.95 2.45 2.95 2.25 2.80 3.25 1.25 2.20 0.75

Sep 1.75 1.95 2.45 2.95 2.20 2.70 3.20 1.30 2.20 0.75

Forecasts

Dec 1.75 1.95 2.75 3.20 2.20 3.00 3.50 1.45 2.60 0.60

Mar 1.75 1.95 2.80 3.25 2.30 3.05 3.55 1.55 2.75 0.50

2018 Jun 1.75 2.05 2.80 3.25 2.40 3.05 3.55 1.70 2.75 0.50

Sep 2.00 2.30 3.15 3.60 2.60 3.40 3.90 1.95 3.00 0.60

Dec 2.25 2.55 3.25 3.70 2.85 3.50 4.00 2.20 3.00 0.70

Mar 2.50 2.80 3.25 3.70 3.10 3.50 4.00 2.30 3.00 0.70

2019 Jun 2.75 3.05 3.30 3.75 3.20 3.50 4.00 2.30 3.00 0.75

Sep 3.00 3.20 3.35 3.80 3.30 3.50 4.00 2.30 3.00 0.80

Dec 3.00 3.20 3.40 3.85 3.30 3.55 4.05 2.30 3.00 0.85

Exchange Rates (End Period)

USD Forecasts NZD Forecasts

NZD/USD AUD/USD EUR/USD GBP/USD USD/JPY NZD/USD NZD/AUD NZD/EUR NZD/GBP NZD/JPY TWI-17

Current 0.69 0.77 1.16 1.33 114 0.69 0.90 0.59 0.52 78.7 73.3

Dec-17 0.70 0.75 1.17 1.33 116 0.70 0.93 0.60 0.53 81.2 75.3

Mar-18 0.69 0.74 1.18 1.30 118 0.69 0.93 0.59 0.53 81.4 74.5

Jun-18 0.69 0.73 1.20 1.31 118 0.69 0.95 0.58 0.53 81.4 74.5

Sep-18 0.70 0.73 1.22 1.28 118 0.70 0.95 0.57 0.54 82.0 74.9

Dec-18 0.70 0.73 1.20 1.26 120 0.70 0.96 0.58 0.56 84.0 75.7

Mar-19 0.71 0.74 1.20 1.25 120 0.71 0.96 0.59 0.57 85.2 76.5

Jun-19 0.72 0.75 1.18 1.24 120 0.72 0.96 0.61 0.58 86.4 77.5

Sep-19 0.73 0.76 1.18 1.25 118 0.73 0.95 0.61 0.58 85.6 77.4

Dec-19 0.73 0.76 1.17 1.24 117 0.73 0.95 0.62 0.59 84.8 77.4

Mar-20 0.73 0.76 1.19 1.26 116 0.73 0.96 0.61 0.58 84.7 77.5

TWI Weights

14.0% 20.7% 11.3% 4.6% 6.4%

Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ

bnz.co.nz/research


Page 17

Annual Forecasts

As at 2 November 2017

Forecasts December Years

as at 2 November 20172016 2017 2018 2019 2020 2015 2016 2017 2018 2019

GDP - annual average % change

Private Consumption 2.8 4.8 3.4 3.3 2.3 2.9 4.3 4.0 3.1 2.7

Government Consumption 2.6 2.4 3.2 1.6 1.3 2.6 2.2 3.5 1.8 1.2

Total Investment 2.5 5.6 1.9 3.9 3.0 2.1 5.5 2.7 3.3 3.5

Stocks - ppts cont'n to growth -0.2 -0.3 0.0 0.2 0.0 -0.3 0.0 0.0 0.1 0.0

GNE 2.5 4.3 3.1 3.3 2.3 2.3 4.1 3.6 3.0 2.6

Exports 5.6 0.7 2.4 2.7 4.3 6.9 1.6 1.0 2.6 4.2

Imports 2.0 5.1 4.4 3.8 3.4 3.7 3.4 5.1 3.8 3.6

Real Expenditure GDP 3.5 3.0 2.5 2.9 2.5 3.2 3.5 2.4 2.7 2.8

GDP (production) 2.4 2.9 2.5 3.0 2.5 2.5 3.0 2.5 2.8 2.8

GDP - annual % change (q/q) 2.8 2.5 2.5 3.4 2.1 2.2 2.6 2.6 3.3 2.2

Output Gap (ann avg, % dev) 0.8 0.9 0.8 1.2 1.0 0.8 0.9 0.8 1.0 1.1

Household Savings (gross, % disp. income) 1.2 0.1 0.2 0.4 0.7

Nominal Expenditure GDP - $bn 250.7 264.7 277.2 288.8 300.6 247.6 260.7 274.7 285.7 297.6

Prices and Employment - annual % change

CPI 0.4 2.2 1.6 2.1 2.0 0.1 1.3 2.1 2.0 2.1

Employment 2.0 5.7 3.2 2.0 1.6 1.4 5.8 3.7 2.1 1.8

Unemployment Rate % 5.2 4.9 4.4 4.5 4.6 5.0 5.3 4.5 4.4 4.6

Wages - ahote 2.5 1.1 2.8 2.8 2.7 2.5 1.1 2.7 2.6 2.8

Productivity (ann av %) 0.3 -2.6 -1.3 0.5 0.7 0.1 -1.7 -1.8 -0.1 0.9

Unit Labour Costs (ann av %) 2.5 4.7 4.0 2.7 2.5 2.6 3.6 4.3 3.3 2.3

External Balance

Current Account - $bn -7.3 -7.7 -6.3 -8.9 -9.7 -8.0 -6.6 -6.6 -8.8 -9.5

Current Account - % of GDP -2.9 -2.9 -2.3 -3.1 -3.2 -3.2 -2.5 -2.4 -3.1 -3.2

Government Accounts - June Yr, % of GDP

OBEGAL (core operating balance) 0.7 1.5 1.0 0.9 1.6

Net Core Crown Debt (excl NZS Fund Assets) 24.5 22.4 22.9 23.1 22.4

Bond Programme - $bn 7.0 8.0 8.0 9.0 10.0

Bond Programme - % of GDP 2.8 3.0 2.9 3.1 3.3

Financial Variables (1)

NZD/USD 0.67 0.70 0.69 0.71 0.73 0.68 0.70 0.70 0.70 0.73

USD/JPY 113 113 118 120 116 122 116 116 120 117

EUR/USD 1.11 1.07 1.18 1.20 1.19 1.09 1.05 1.17 1.20 1.17

NZD/AUD 0.90 0.92 0.93 0.96 0.96 0.93 0.96 0.93 0.96 0.95

NZD/GBP 0.47 0.57 0.53 0.57 0.58 0.45 0.56 0.53 0.56 0.59

NZD/EUR 0.61 0.66 0.59 0.59 0.61 0.62 0.67 0.60 0.58 0.62

NZD/YEN 76.2 79.1 81.4 85.2 84.7 82.1 81.6 81.2 84.0 84.8

TWI 72.2 76.5 74.5 76.5 77.5 73.4 78.1 75.3 75.7 77.4

Overnight Cash Rate (end qtr) 2.25 1.75 1.75 2.50 3.00 2.50 1.75 1.75 2.25 3.00

90-day Bank Bill Rate 2.41 1.98 1.95 2.78 3.12 2.78 2.02 1.95 2.53 3.20

5-year Govt Bond 2.40 2.70 2.80 3.25 3.45 2.95 2.75 2.75 3.25 3.40

10-year Govt Bond 2.90 3.25 3.25 3.70 3.90 3.45 3.30 3.20 3.70 3.85

2-year Swap 2.30 2.30 2.30 3.10 3.20 2.80 2.40 2.20 2.85 3.30

5-year Swap 2.60 3.00 3.05 3.50 3.70 3.15 3.00 3.00 3.50 3.65

US 10-year Bonds 1.90 2.50 2.75 3.00 3.00 2.25 2.50 2.60 3.00 3.00

NZ-US 10-year Spread 1.00 0.75 0.50 0.70 0.90 1.20 0.80 0.60 0.70 0.85

(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

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Page 18

Forecast Median Last Forecast Median Last

Friday 3 November

Aus, Retail Trade, September +0.5% +0.4% -0.6%

China, Services PMI (Caixin), October 50.6

UK, Markit/CIPS Services, October 53.4 53.6

US, International Trade, September -$43.3b -$42.4b

US, Non-Farm Payrolls, October +312k -33k

US, ISM Non-Manuf, October 58.5 59.8

US, Factory Orders, September +1.2% +1.2%

Monday 6 November

NZ, ANZ Comdty Prices (world), October +0.8%

NZ, RBNZ 2yr Inflation Expectations, Q4 +2.09%

Aus, ANZ Job Ads, October flat

Jpn, BOJ Minutes, 20/21 Sept. Meeting

Germ, Factory Orders, September +3.6%

US, Fed's Dudley Speaks, Econ Club NY

Tuesday 7 November

NZ, Crown Financial Statements, 3m-to-Sept 2017

Aus, RBA Policy Announcement 1.50% 1.50% 1.50%

Euro, Retail Sales, September -0.5%

Germ, Industrial Production, September +2.6%

US, JOLTS Job Openings, September 6,082

Wednesday 8 November

NZ, Dairy Auction, GDT Price Index -1.0%

NZ, NZ Parliament Opens

China, Trade Balance, October +CNY274b+CNY193b

Thursday 9 November

NZ, RBNZ MPS 1.75% 1.75% 1.75%

Aus, Housing Finance, September +1.0%

China, CPI, October y/y +1.7% +1.6%

Jpn, BOJ Summary of Latest Meeting, 30/31 Oct. Meeting

Jpn, Machinery Orders, September -2.0% +3.4%

Euro, EC GDP Forecasts

Euro, ECB Economic Bulletin

UK, Industrial Production, September +0.2%

Friday 10 November

NZ, Electronic Card Transactions, Oct +0.4% -0.1%

Aus, Qtly Monetary Statement

US, Mich Cons Confidence, November 1st est 100.0 100.7

Monday 13 November

NZ, Food Price Index, October -0.9% -0.2%

Aus, RBA's Debelle Speaks, UBS Conference

Tuesday 14 November

Aus, NAB Business Survey, October +7

China, Industrial Production, Oct y/y +6.3% +6.6%

China, Retail Sales, Oct y/y +10.4% +10.3%

Euro, Industrial Production, September +1.4%

Euro, GDP, Q3 2nd estimate +0.6%P

Germ, ZEW Sentiment, November +17.6

Germ, CPI, Oct y/y 2nd est +1.6%P

Tuesday 14 November cont’d

Germ, GDP, Q3 1st est +0.6%

UK, CPI, October y/y +3.0%

US, PPI ex-food/energy, October y/y +2.2%


Aus, Labour Price Index, Q3 +0.5%

Aus, Consumer Sentiment - Wpac, November 101.4

Jpn, GDP, Q3 1st est +0.4% +0.6%

UK, Unemployment Rate (ILO), September 4.3%

US, Retail Sales, October flat +1.6%

US, CPI ex food/energy, October y/y +1.7%

US, Empire Manufacturing, November +30.2

US, Business Inventories, September +0.7%

Thursday 16 November

NZ, ANZ-RM Consumer Confidence, 126.3

November

Aus, Employment, October +20k

UK, Retail Sales vol., October -0.8%

US, Philly Fed Index, November +27.9

US, Industrial Production, October +0.6% +0.3%

Friday 17 November

NZ, BNZ PMI (Manufacturing), October 57.5

NZ, Business Price Indexes, PPIO Q3 y/y +5.2%

US, Housing Starts, October 1,165k 1,127k

Saturday 18 November

China, Property Prices, October

Monday 20 November

NZ, BNZ PSI (Services), October 56.0

Jpn, Merchandise Trade Balance, October +Y670b

US, Leading Indicator, October -0.2%

Tuesday 21 November

Aus, RBA Minutes, 7 November Meeting

Jpn, All Industry Index, September +0.1%

US, Existing Home Sales, October 5.39m


NZ, External Migration, October s.a. +5,190

Aus, Construction Work Done, Q3 +9.3%

Aus, Westpac Leading Index, October +0.08%

Euro, Consumer Confidence, Nov 1st est -1.0

US, FOMC Minutes, 1 Nov. meeting

Thursday 23 November

NZ, Retail Trade, Q3 vol s.a. +1.7%R

Euro, ECB Minutes, 26 Oct Meeting

US, Holiday, Thanksgiving

Friday 24 November

NZ, Residential Lending, October y/y -21.7%

NZ, Merchandise Trade, October -$1,143m

Germ, IFO Index, November 116.7

US, Markit PMI, Nov 1st est 54.6

Calendar

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Page 19

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Documents

RESEARCH Strategist - BNZ · 2017. 11. 2. · Strategist bnz.co.nz/research 2 November 2017 Page 2 Slump in confidence does not portend slump in activity Though growth likely to undershoot