Key Global Developments And Financial Markets
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Data Flash (New Zealand) March 2001 in Review
KEY GLOBAL DEVELOPMENTS AND FINANCIAL MARKETS
It has been a volatile month for both global equity and bond markets. The plunge in equity prices in the first three weeks of March, particularly after the market's disappointment with the Fed's 50 bp rate cut, saw bond yields fall to new lows for the year. The subsequent bounce in equities and the surprising rebound in US consumer confidence then pushed yields sharply higher. The main story in financial markets, however, continues to be the strength of the USD.
In terms of events, again the key focus was firmly on the FOMC decision. The weakness in equity markets in the lead up to the meeting convinced many that the Fed would go by more than 50 bp on 20 March. However, the Fed cut decided to cut by 50 bp, softening the blow somewhat by indicating it was monitoring developments closely. With equity markets falling sharply after the announcement many analysts speculated that the Fed was set to move before the next scheduled meeting on 15 May. However, the surprising resilience in consumer confidence (as reported in both the Conference Board and Michigan surveys) has reduced the prospect of an inter-meeting move. Not surprisingly, the Eurodollar strip has given up considerable ground since the publication of the Conference Board's consumer confidence survey. However, the weakness in the Chicago PMI - if confirmed by the NAPM - may give some hope to those looking for an inter-meeting move.
Perhaps the most significant events, however, have been elsewhere. The sharp fall in the Ifo index highlighted the risks to the global economy from the US slowdown. Meanwhile, in Japan the news just keeps getting worse. At one point the Nikkei was at 16 year lows, while a weak IP result for February (after the plunge in January) suggests that IP will decline for the March quarter as a whole. This would be the first quarterly decline for 7 quarters. Not surprisingly, the BoJ has reacted to the deteriorating situation in Japan by returning to the zero interest rate policy. The BoJ also announced it would increase its outright purchases of long term JGBs if necessary to ensure the smooth supply of liquidity. Our Japanese economics team do not believe this will be akin to a quantitative easing and expect the Bank's operations to be similar to the previous zero interest rate policy.
KEY NEW ZEALAND DATA AND EVENTS
The key event this month was the RBNZ's decision on 14 March to lower its official cash rate by 25bps to 6.25%. The move had been largely priced in markets, but a poll of economists had shown just 4 of 16 expecting a cut. The decision to reduce the OCR had been made just two days earlier - the RBNZ had been inclined to leave rates unchanged - following weakness in US equity markets, negative commentary on Japan and the unexpected 0.6% qoq decline in Australian GDP during Q4.
The key domestic data releases over March were:
Building Consents (Jan) - 1 Mar: The number of dwelling consents issued rose 6% mom following a 9% mom decline in December.
Wholesale Trade Survey (Q4) - 2 Mar: Wholesale sales rose 4.8% qoq in nominal terms. However, with wholesale prices rising by 4.9% qoq, volumes were broadly unchanged. External Migration (Jan) - 6 Mar: A net 1740 persons left NZ permanently in January. However, short-term visitor arrivals were 18% higher than a year earlier.
Motor Vehicle Registrations (Feb) - 6 Mar: Total registrations rose 2.9% mom - the third consecutive monthly rise - but remained nearly 11% weaker than a year earlier.
ANZ Job Ads ? The trend number of job ads - the headline figure reported by the ANZ - fell 0.9% mom in February. However, in seasonally adjusted terms, the number of job ads rose 0.8% mom following a rise of 2.1% mom in January.
Retail Trade (Jan) - 12 Mar: Total retail sales fell 0.3% mom but were flat excluding motor vehicle sales and services. This result was slightly weaker than market expectations.
Overseas Trade Indexes (Q4) - 12 Mar: ? Export prices rose 9.2% qoq in Q4 to be 27.1% higher than a year earlier. Import prices rose 8.0% qoq in Q4 to be 22% higher than a year earlier. Both increases were much stronger than market expectations.
Colmar Brunton Consumer Confidence (Mar) - 12 Mar: Consumer confidence rose from +33 to +38.
Food Price Index (Feb) - 13 Mar: Food prices rose 0.5% mom to be 5.7% higher than a year earlier. The market had expected a flat result, but higher prices for fruit and vegetables pushed the index higher.
Manufacturing Survey (Q4) - 13 Mar: Sales and profitability continued to rise in Q4, especially in the primary goods sector.
RBNZ Monetary Policy Statement - 14 Mar: In what was described as the hardest decision Governor Brash had made in his three terms in charge, the RBNZ cut its OCR by 25bps to 6.25%.
External Migration (Feb) - 21 Mar: A net 2530 people left NZ permanently in March - the largest monthly outflow in over 5 years. Visitor arrivals were also quite weak, up just 4% on last February and falling 6% mom in seasonally adjusted terms.
Balance of Payments (Q4) - 23 Mar: A current account deficit of $1,863m was reported, compared with market expectations of $1,400m. ? The worse than expected outcome was due to a much higher than expected deficit on investment income, reflecting a rebound in profits earned by foreign companies operating in New Zealand. .
Building Consents (Feb) - 26 Mar: The number of dwelling consents issued rose a further 4% mom in February, confirming a gradual turnaround in housing market activity.
Merchandise Trade (Feb) - 27 Mar: A provisional surplus of $413m was reported for February, compared with market expectations of a $190m. A very weak month for imports was the key factor explaining the surprise.
WestpacTrust Consumer Confidence Index (Q1) - 27 Feb: Consumer sentiment remained very robust with the WestpacTrust index of consumer sentiment rising from 113.8 to 121.6 - the highest reading for a year.
National Bank Business Survey (Mar) - 28 Feb: Sentiment in the business sector continued to strengthen with the indexes of general business confidence and own firm confidence rising by 10 and 3 points respectively.
Gross Domestic Product (Q4) - 30 Mar: The economy expanded 0.5% qoq in Q4, slightly weaker than the 0.7% qoq growth expected by the market (although growth in Q3 was also revised up by 0.1% qoq). The export sector drove the positive result, with the agriculture and tourism sectors the stand-out performers.
In line with global trends, NZ fixed income markets endured a roller coaster month with a substantial rally early in the month - particularly at the front end of the curve - later cancelled out by a sell-off towards the end of the month. The 10Y bond ended the period marginally higher in yield than it had started (the spread against the US remained at around 108bps). However, the 3Y bond finished marginally lower in yield. As a result, the 3Y to 10Y part of the curve steepened, with the spread moving from +19 to +27. The NZD had a miserable month, loosing nearly 7% of its value against the USD. After making gains against the AUD earlier in the month, it gave up most of those gains in the closing days to end up only marginally. The NZD weakened just over 3% in trade weighted terms over the period.
The latest Colmar Brunton poll showed Labour down 2 points to 45, National up 1 to 38, Alliance up 1 to 4, ACT unchanged on 5, Greens unchanged on 3 and NZ First unchanged on 2. The Government's approval rating fell 2 points to 20, but Helen Clark's PM rating rose 4 to 38%
Darren Gibbs, Senior Economist
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