Key Global Developments And Financial Markets
Volatility in financial markets has been a key theme for the month. For instance, the yield on the 10Y UST note traded in a 40bp range over the month, finishing at its high for the year after starting the month at less than 5%. The front end has been similarly volatile. The June Eurodollar contract, for instance, traded in a 50bp range during April. Rather than finishing close to its high in yield terms, however, the interest rate implied by the Eurodollar contract finished the month not far off its lows. Equity markets were also volatile, though they generally showed a pattern of strong gains during the month - particularly after the Fed's rate cut.
The Fed rate cut was, of course, the `event' highlight for the month and arguably the reason for much of the volatility. The Fed seemed to time their rate cut on 18 April just as most market watchers had given up any hope of such a move. In cutting rates the Fed highlighted the deteriorating investment and corporate profits picture together with the risk of slower growth abroad and the loss of equity wealth that threatened to "keep the pace of economic activity unacceptably weak." The Fed retained its easing bias.
In the event, US growth has turned out to be much stronger than most expected. Annualised, the US economy grew 2% in Q1. While the partial indicators had caused forecasters to revise their numbers up significantly, it is worth recalling that earlier in the year many had been picking negative growth in the first half of 2001. That possibility seems to have faded. Not surprisingly, the bond market has struggled in the face of an aggressive Fed and strong data. Even if the Fed does deliver another rate cut or two, it could be a struggle for long bonds to make much headway from here. Their last hope is the possibility that the resilience of the US consumer will crack in the face of increasing job loses. Certainly the weekly jobless claims numbers have turned up and are pointing to at least a couple of very weak employment reports. The non-farm payrolls data at the end of this week could be the key event before the FOMC's May meeting. Elsewhere, the ECB remains on hold and Japan has a new Prime Minister. The ECB's reluctance to cut rates stems from a succession of `disappointing' inflation and money growth outcomes. At this stage it appears that the ECB are better defenders of the real value of long term bonds than the Fed, but at what cost to growth? The German Ifo index recorded yet another decline. Japan's new Prime Minister, Junichiro Koizumi, has been making encouraging noises on the prospects for reform. Only time will tell, and experience makes us wary of expecting too much from Japanese leaders. In the meantime, the Japanese data have taken another turn for the worse and the BoJ has downgraded the prospects for the economy. The zero interest rate policy looks set to remain for quite some time.
KEY NEW ZEALAND DATA AND EVENTS
In a fairly quiet month for data, the key local event this month was the RBNZ's decision on 19 April to lower its official cash rate by a further 25bps to 6.0%. The move had been fully priced in markets and was expected unanimously by economists. The RBNZ cited further evidence of weak global economic conditions - reflected in further downward revisions to Consensus Forecasts estimates of trading partner growth - as the key factor underpinning its decision. However, evidence of weaker domestic confidence and a lower than expected headline CPI outcome probably helped to cement the move.
The key domestic data releases over April were:
Motor Vehicle Registrations (Mar) - 3 Apr: The number of motor vehicle registrations rose 1% mom (the fourth consecutive increase) but was 9.6% weaker than a year earlier. Registrations of second-hand vehicles continue to outperform new vehicles, suggesting a consumer-led rather than business-led increase in vehicle demand.
Retail Trade (Feb) - 6 Apr: ? Total nominal retail sales rose 0.9% mom in February - bang on market expectations - following a revised 0.6% mom decline in January (revised from -0.3% mom).
Colmar Brunton Consumer Confidence (Apr) - 9 Apr: Confidence declined to +22 in April from +38 in March, probably reflecting increased media focus on the global slowdown, drought conditions and the weak NZD.
QSBO Business Survey (Q1) - 10 Apr: Business optimism plummeted from to -2 from +31 in Q4. Most other indicators of current activity remained firm.
Nonetheless, with pricing indicators also easing considerably, the survey was instrumental in cementing market expectations of a 25bp rate cut by the RBNZ on 19 April.
ANZ Job Ads (Apr) - 10 Apr: The number of job ads rose 2.5%mom - the third consecutive rise - and consistent with the economy continuing to growth in Q1 despite a decline in business confidence.
Consumers Price Index (Q1) - 18 Apr: The CPI declined 0.2% qoq in Q1, reducing the annual rate to 3.1% from 4.0% previously. Lower petrol prices and international airfares reinforced the impact of a one-off change in state house rentals (substracting 0.6pps). However, measures of core inflation were less flattering, with the RBNZ's weighted median measure rising 0.6% qoq following a 0.8% qoq increase in Q4.
RBNZ Interim Cash Rate Review - 19 Apr: As expected, the RBNZ reduced its OCR by 25bps to 6%. However, the RBNZ warned much of the disinflationary sting stemming from weakening global demand could be offset if the world prices for New Zealand's commodities remained robust and the NZD remained weak.
REINZ House Sales ?(Mar) - 19 Apr: The number of house sales fell 2.5% mom following a 10% rise in February. Compared with a year earlier, the number of sales was little changed.
Credit Card Billings ?(Mar) - 20 Apr: Credit card billings rose a very strong 5.8%mom. Combined with an increase in vehicle registrations, this outcome suggests a further 1% mom rise in retail sales is likely in March.
External Migration (Mar) - 20 Apr: Following several months of strong net outflows, migrant flows were in balance in March. Short-term visitor arrivals bounced back following a weak February, rising 7.4% mom to be 16.2% higher than a year earlier. In contrast, the number of short visits overseas by New Zealand residents rose just 1.3% compared with a year earlier.
NBNZ Business Survey (Apr) - 30 Apr: The April NBNZ survey painted a more robust picture of business confidence than the earlier QSBO. Headline business confidence fell from +30 to +17 while firms' own activity expectations fell from +41 to +37. However, once seasonal factors are taken into account, confidence was only 3pts lower and activity expectations actually rose 1pt.
In line with global trends, the long end of the fixed income market endured a substantial sell-off during the month. Indeed, the 10NZGB under-performed its UST equivalent, rising 60bps in absolute yield and 18bps in spread terms (to 126bps over the UST). The short-end, however, remained supported by rate cut expectations. The yield on 90 day bank bills fell 37bps over the month, while the implied yield on the June bank bill future fell 14bps. The market expects a further 25bp cut from the RBNZ on 16 May. The NZD had a slightly better month, rising by 2.5% against the USD. However, the gain was less impressive on a trade weighted basis, reflecting lost ground against the AUD. The New Zealand equity market enjoyed further gains, with NZSE40 ending the month up 87pts to 2117 - an 11% gain since the beginning of this year.
The latest Colmar Brunton poll showed little change in the party rankings with Labour up 1 point to 46% of the vote, National down 1 to 37%, Alliance down 1 to 3%, ACT down 1 to 4%, Greens up 2 to 5% and NZ First steady on 2%.