NZ: May 2001 in Review
Data Flash (New Zealand)
NZ: May 2001 in Review
KEY GLOBAL DEVELOPMENTS AND FINANCIAL MARKETS
For much of May financial markets appeared to be voting increasingly in favour of a V-shaped recovery, with equity markets rallying and bond markets selling off. At the same time, the current data, if anything, deteriorated. Non-farm payrolls fell by more than 200,000 over April (later revised up to a fall of 189,000), durable goods orders plunged, the Japanese data took a turn for the worse and the German Ifo survey was weaker than expected. All these releases seem to confirm that the Fed was right to ease 50bp in May and to see the risks to the outlook as firmly tilted to the downside.
Yet, despite all this, at the end of the month the market was not fully pricing in one more 25bp cut by the Fed, even as equities seemed to be having second thoughts about the prospects for recovery. It seems that interest rate markets have become fixated with fears about inflation. Greenspan and the Fed have been sufficiently concerned by this to comment specifically on the inflation outlook, noting that the easing in capacity constraints will mean an easing in inflation pressures over time. Close watchers of the Fed have noted, however, that Greenspan's conviction on this has been toned down a bit. His assessment of inflation has been amended from "well contained" to "prices seem likely to be contained". Not much of a shift you might think, but perhaps enough to justify the market's view that the Fed is just about done. The last day of the month saw a rally in US fixed income markets as the Chicago PMI surprised on the weak side and jobless claims rose again. Perhaps the markets are coming to the realisation that the US economy is by no means out of the woods yet? For the bond market June is starting in a positive fashion.
In FX markets, most attention was focused on the major currencies. EUR/USD fell by 4 big figures over May and USD/JPY traded a 5 big figure range. While US data remained soft, markets retained comfort in the Fed's ability to revive the economy. Conversely, soft Euroland numbers have hit the EUR, perhaps because of concerns about the ECB's competency. Changes to equity index weightings also had an impact on flows. The largest flows over the month related to EUR selling out of Japan, resulting in a large decline in EUR/JPY.
KEY NEW ZEALAND DATA AND EVENTS
The key local event this month was the RBNZ's decision on 16 May to lower its official cash rate by a further 25bps to 5.75%. The move had been fully priced in markets and was expected by most 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. Although some economists had called for a larger cut, the RBNZ revealed that it had only considered a 25bp and no move as possible options, with robust commodity prices, the weak NZD and evidence that the domestic economy was gathering momentum as providing some offset to the negative global news.
A busy month saw the following domestic data releases:
Motor Vehicle Registrations (Apr) - 3 May: Total registrations rose 6% mom (the fifth consecutive increase), driven by a 9.2% increase in registrations of used vehicles.
Quarterly Employment Survey ?(Q1) - 9 May: Private sector ordinary time wages rose 1.5% qoq, much higher than the 0.8% qoq increase expected by the market. As a result, the market significantly downgraded its view of the likelihood of a 50bp rate cut by the RBNZ on 16 May.
Labour Cost Index ?(Q1) - 9 May: Private sector labour costs (adjusted for productivity) rose 0.5% qoq, in line with expectations.
Household Labour Force Survey ?(Q1) - 10 May: Although employment was flat for the quarter, a 2.8% qoq rise in hours paid and a further fall in the unemployment rate to a new 13 year low of 5.4% eliminated any remaining hope of a 50bp rate cut on 16 May.
Food Price Index (Apr) - 11 May: The FPI rose 0.4% mom to be 6% higher than a year earlier - a 10-year high.
ANZ Job Ads (Apr) - 11 May: Jobs ads fell 4.1% mom in April. The outcome may have been distorted by the Easter holidays - the May survey will be awaited with interest.
Colmar Brunton Consumer Confidence (May) - 14 May: Confidence declined to +11 in April from +22 in March and +38 in February.
RBNZ Monetary Policy Statement and OCR Review - 16 May: As expected, the RBNZ reduced its OCR by 25bps to 5.75%. The tone of the Statement was more dovish than the market had expected, but more hawkish comments by RBNZ Governor Brash subsequent provided some balance.
Retail Trade (Q1) - 17 May: Real sales rose 1.4% in Q1, much stronger than the market's expectation of 0.5% qoq. Nominal sales in the month of March rose by 0.9% mom, the same as in February.
REINZ House Sales ?(Apr) - 18 May: The number of house sales rose 15% mom in April to be 24% higher than a year earlier. Along with the previous day's strong retail sales result, the data backed up the RBNZ's view that the domestic economy was stronger than many had credited.
External Migration (Apr) - 21 May: A small net inflow of migrants was recorded - the first since November 1999. Tourist arrivals fell 1% mom but were 7% higher than a year earlier.
House Prices (Q1) - 21 May: House prices fell 0.1% qoq to be 1.2% lower than a year earlier.
NZ Government Budget - 24 May: A weaker outlook for world growth led the Government to substantially revise down its forecast for the operating surplus over the next 4 years. Combined with the impact of increased provisioning for capital spending and debt restructuring (taking some debt onto the Government's balance sheet), the outcome was a much higher-than expected bond tender programme, especially beyond the 2001/02 year.
Building consents (Apr) - 24 May: The number of dwellings consents rose 6.5% mom to the highest level since July 2000, providing further evidence of a recovery in the housing market (albeit from a very weak base).
Overseas Merchandise Trade ?(Apr) - 25 May: A preliminary surplus of $391m was reported for the month of April - much better than the $175m outcome expected by the market. Both stronger than expected exports and weaker than expected imports contributed to the outcome.
Producers Price Index ?(Q1) - 29 May: The Inputs Index fell 0.9% qoq while the Outputs Index fell 0.2% qoq (a little weaker than market expectations), reflecting lower oil and pulp prices and a stronger NZD.
NBNZ Business Survey (May) - 30 May: Business confidence declined further from +17 to +4 but firms' assessment of their own prospects remained robust at +31 (down from +37). Inflation indicators eased slightly.
Wholesale Trade Survey ?(Q1) - 31 May: A very strong Q1 outcome provided further evidence to suggest that growth in Q1 had gained momentum compared with the 0.5% qoq recorded in Q4.
In line with global trends, the long end of the New Zealand fixed income market continued to sell-off this month, with the yield on 10Y NZGBs rising from 6.59% to 6.72%. The 10Y NZGB again under-performed its UST equivalent - the spread widened beyond 130bps for the first time since August 1998. The curve steepened sharply between cash and the 3Y NZGB. The 3Y bond rose 36bps in yield over the month, while the yield on 90-day bank bills fell 3bps and the implied yield on the June bank bill future fell 16bps. The market is divided over whether a further rate cut from the RBNZ is to be expected in June/July. After gaining ground through mid-May, the NZD weakened sharply on the last day of the month to end little changed from its opening level. The New Zealand equity market gave back all of its previous month's gains, with the NZSE40 ending the month down 89pts at 2028.
The latest Colmar Brunton poll showed Labour down 2 points to 44% of the vote, National up 4 to 41%, Alliance down 1 to 2%, ACT stable at 4%, the Greens up 1 to 6% and NZ First down 1 to 1%.
Darren Gibbs, Senior Economist
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