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Data Flash (NZ) February 2001 in Review

Data Flash (New Zealand) NZ Monthly Report - February 2001 in Review

Key financial market movements
29 Dec 1 Feb 28 Feb 29 Dec 1 Feb 28
Mar Eurodollar 94.11 94.86 94.98 USD/Yen 114.84 116.00 117.08
NZD Mar bill futs 94.33 94.81 93.63 EUR/USD 0.9297 0.9421 0.9212
90 Day Bank Bill 6.66 6.40 6.45 NZD/USD 0.4407 0.4462 0.4298
3Y NZGB 6.12 5.61 5.78 S&P 500 1320 1373 1240
10Y NZGB 6.02 5.95 5.99 NASDAQ 2471 2783 2152
3Y/10Y spread -10 +34 +21 NZSE40 1901 2015 1972
10Y UST 5.12 5.08 4.95 CRB 228 227 223
10Y NZGB/UST spread +90 +87 +104 NYM crude 26.80 29.82 27.36
Source: DB Global Markets Research, Reuters, RBA, Bloomberg

Comment Following the publication of a further decline in US consumer confidence, the market became fixated with the prospect of another intermeeting rate cut. This speculation was given further impetus by the announcement that Greenspan was revising his testimony for his appearance before the House. In the event, Greenspan said in response to a question that the Fed preferred to move at its regular scheduled meetings. While the market may be mildly disappointed, the scope for further gains in the front end remains if the data continue to print weak and/or equity markets struggle. Elsewhere, the European data remained reasonably robust. With some remaining concerns over inflation and the EUR, the ECB is unlikely to be in a hurry to cut rates. Meanwhile, the BoJ has finally recognised the deteriorating outlook for Japan by cutting the overnight rate 10bps.. In New Zealand, activity data printed generally printed much stronger than market expectations, as did inflation data - a combination that led to a marked reassessment of the likelihood of the RBNZ easing monetary policy as early as March.

KEY GLOBAL DEVELOPMENTS AND FINANCIAL MARKETS The key events in the US over the past month have been the divergent signals sent by the activity and price data and the Fed's expressed faith in a V-shaped recovery. In his address to the Senate Banking Committee, Alan Greenspan expressed confidence that the economy would recover as the inventory adjustment that was underway worked its way through. He did, however note that further declines in confidence could upset this assessment. The Michigan University consumer sentiment survey duly delivered a further decline. The fall in consumer sentiment over the last three months is the fastest since the last recession. However, the bullish sentiment that such weakness would imply has been unsettled by strong PPI and CPI data. At this stage we think the Fed is confident that the economic slowdown will take the pressure off inflation. Thus, these data should not be an impediment to further easing in the months ahead. Still, as Greenspan's updated address to the House Financial Services Committee indicates, the Fed does not feel the need to ease in a super aggressive fashion.

European activity numbers have generally shown surprising resilience. Crucially, the German Ifo report rebounded in January to record its first increase for 8 months. This has strengthened the case of those who believe Europe will be able to withstand the US slowdown in good shape. Finally, the BoJ has acknowledged the deteriorating outlook for Japan by cutting the overnight rate to 0.15% at the end of the month.

KEY NEW ZEALAND DATA AND EVENTS New Zealand continued to buck the international trend with activity data generally printing much stronger than market expectations, as the export-driven recovery gained momentum. At the same time, and rather ominously, inflation indicators continued to surprise markets on the high side, largely reflecting the continued pass-through from NZD weakness. The key domestic data and events over the month were the following:

Household Labour Force Survey (Q4) - 8 Feb: For the second quarter in a row, the HLFS printed much stronger than market expectations. Employment rose 1.1% qoq, driving the unemployment rate down to a 12-year low of 5.6%.

Quarterly Employment Survey (Q4) - 9 Feb: The QES confirmed the strong employment result in the HLFS. Private sector ordinary time wage rates rose 0.4% qoq, lifting the annual movement from 1.4% to 2.6%.

Labour Cost Index (Q4) - 9 Feb: The LCI reported a 0.4% qoq lift in private sector ordinary time wage rates (adjusted to remove productivity-related increases). However, the average increase amongst those job specifications reporting a lift in wages was 3.6%, up from 3.1% in the previous two quarters. Retail Trade (Q4) - 13 Feb: The volume of retail sales fell 0.5% qoq, a slightly greater decline than expected by market, reflecting weak sales in October and November. Nominal sales in December rose 1.0% mom, consistent with a sharp lift in consumer confidence.

Food Price Index (Jan) - 14 Feb: Food prices rose 1.6% mom. A 1.6%mom increase in grocery prices - the largest monthly increase since 1989 - made the most significant contribution. Markets had expected a 0.4% mom rise.

Capital Goods Price Index (Q4) - 19 Feb: Capital goods price rose 2.2% qoq/4.8% yoy, the largest increase for 10 years. A 4.1% qoq rise in plant and machinery prices made a significant upward contribution.

Retail Sales - First Estimate (Jan) - 19 Feb: Nominal retail sales were unchanged in January, but rose 0.6% mom excluding the automotive store-types. We would not be surprised if this result is revised up when the final figures are released, with credit card billings pointing to a somewhat stronger outcome. TV3 Consumer Confidence (Feb) - 20 Feb: A net 45% of respondents expected the economy to improve over the next 3 months, while a net 21% of respondents saw further falls in unemployment.

Value of Work Put In Place (Q4) - 23 Feb: As expected, construction activity fell by around 5% qoq in Q4, with strengthening non-residential activity offset by weakness in the housing market.

National Bank Business Survey (Feb) - 28 Feb: Business confidence shrugged off international pessimism, rising to +31 from +19 previously. Other activity indicators were also up across the board. Pricing intentions fell from +45 to +31, but year-ahead inflation expectations remained above 3%.

Producers Price Index (Q4) - 28 Feb: For the second quarter in a row the inputs index printed at double the market expectation, recording a 3.6% qoq/10.2% yoy rise. Output prices rose 2.2% qoq/6.8% yoy. The weak NZD and higher prices for oil -based products and some exported commodities were the key drivers.

Overseas Merchandise Trade (Jan) - 28 Feb: A trade surplus of $101m was recorded compared with market expectations of $140m. Exports were in line with our forecast. However, imports of consumption goods rebounded very strongly from a weak December, suggesting retailers see better times ahead.

Review of Monetary Policy - 28 Feb: The Government released Prof. Lars Svensson's report on the review of monetary policy. As expected, the report was of little interest to markets, with the main recommendation being that monetary policy decisions be transferred from the Governor to a 5-member internal committee at the conclusion of Dr Brash's current term.

NEW ZEALAND MARKETS The wealth of strong activity and inflation data saw the market move to price out the previously foreseen rate cut by the RBNZ in March, with the physical bill market now pricing just over a 25% chance of a rate cut in March. However, the market still sees a 90% chance that rates will be 50bps lower following the May meeting. The 10Y spread against US Treasuries rose 17bps to 104bps, however this largest reflected changes in the 10Y benchmark bonds used in NZ and the US (in New Zealand, the NZGB11/11 bond is the new 10Y benchmark). The NZD had a disappointing month, losing some 3.6% against the USD on the back of a weaker AUD and Euro, although the NZD/AUD cross rose to its highest level since last May. Darren Gibbs, Senior Economist (649) 351-1376

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