May 2002 in Review
Key Global Developments And Financial Markets
Data Flash (New Zealand) May 2002 in Review
KEY GLOBAL DEVELOPMENTS AND FINANCIAL MARKETS
In our view the US recovery is on track and will probably lead to rate increases by the Fed in August or September. For now, however, the focus of markets seems to be on geopolitical concerns (the Middle East and Kashmir), while equities are struggling to gain headway on the back of economic news that is solid rather than spectacular.
The latest economic news for the US has been positive. The May ISM Index (formerly NAPM) rose to 55.7 points on broadbased gains. Furthermore, April factory orders rose 1.2%. In the detail, non-defence capital orders excluding aircraft rose 4%, more than offsetting the 3.4% decline in March. These data hint that capital spending is continuing to improve. The signals from the labour market are more mixed, however. April employment only rose 43,000, while the previously recorded increase for March was revised away to become a decline of 21,000. The unemployment rate has risen to 6% and the weekly claims figures suggest it remained around this level in May.
Meanwhile there are encouraging signs of recovery in Europe. The German May Ifo index rose to a level of 91.5, with the increase mainly led by the gain in the expectation component to 106.7. The French INSEE survey rose 3 points to 101, the second consecutive 3-point rise in the series. The survey now stands above its long run average of 100 and is a pointer to solid French growth. Even Japan is showing signs of improvement. IP grew 0.2% in April. While this was less than the market expected, producers anticipate a very strong rise in production in May. If even partially correct, activity in Q2 could be some 3% stronger than in Q1.
In financial markets, the key development appears to be the emerging weakness in the USD. Virtually every currency we look at made notable gains against the Greenback during May. In the context of the Dollar's strength over the past few years the correction is still fairly small and the prospect of further substantial weakness may become a major issue for markets over the course of this year.
KEY NEW ZEALAND DATA AND EVENTS
ANZ Commodity Prices (Apr) - 3 May: The average foreign currency price of New Zealand's commodity exports rose by 0.2% mom in April. The average price was 8.8% below last year's level. Reflecting the appreciation of the NZD, the NZD price index fell 2.0% mom to be 16.6% weaker than a year earlier.
Quarterly Employment Survey (Q1) - 3 May: Private sector average hourly earnings (ordinary time) increased by 0.6% qoq and were 2.5% above last year's level. Adjusting for seasonal factors, the survey recorded a 0.4% qoq increase in filled jobs and a 1.4% qoq increase in paid hours.
Labour Cost Index (Q1) - 3 May: This index, which is best interpreted as a measure of unit labour costs, showed a 0.5% qoq / 2.0% yoy increase in private sector wage rates (ordinary time).
Motor Vehicle Registrations (Apr) - 6 May: Total registrations fell by 2.8% mom in April (s.a.), but were 16.1% stronger than a year earlier.
Household Labour Force Survey (Q1) - 9 May: Employment rose 1.3% qoq in Q1 and was 3.5% higher than a year earlier, while the number of total hours worked rose 1.3% qoq / 2.2% yoy. Labour force participation increased to 66.9% (an all-time high) from 66.4% in Q4. As a result, despite robust growth in employment, the unemployment rate fell just 0.1pp to 5.3% from 5.4% in Q4.
ANZ Job Ads (Apr) - 10 May: The number of newspaper job advertisements rose 6.3% mom in April following a 2.5% decline in March. The timing of Easter has had a substantial impact on this data. The level of advertising remains 1% lower than a year earlier and 6.1% below its July 2001 peak.
Retail Trade (Mar and Q1) - 10 May: The value of retail sales fell by 0.8% mom in March, following increases of 0.6% and 2.0% in January and February respectively. Over Q1 as a whole, the value of nominal retail sales increased by 2.6% qoq. With an increase in the retail deflator of 0.4%, the volume of retail sales rose 2.2% qoq and was 6.2% higher than in early 2001.
Food Prices (Apr) - 13 May: The food price index rose 0.1% mom. The annual rate of food price inflation declined to 5.2% from 5.5%.
RBNZ Monetary Policy Statement- 15 May: The RBNZ increased the official cash rate (OCR) by 25 bps to 5.50%. The tone of the Statement was relatively hawkish and the RBNZ projected 90 day interest rates to reach 7% in early 2003 (compared to 6.25% in the March forecasts). However, the Bank noted that stronger than expected NZD performance would take pressure off interest rates. The Bank projected the TWI to average 53.5 over the second half of this year and 54.75 in H1/2003. The TWI was at 55.6 on 31 May.
Consumer Confidence (May) - 20 May: The Colmar Brunton poll showed a rise in net consumer optimism from +25% to + 31%.
International Consensus Forecasts (May) - 20 May: The Index of growth for NZ's 14 largest trading partners (based on Consensus Forecasts) ticked up 0.1pp to 2.6% for the 2002 year. Growth expectations for 2003 remained at 3.5%.
Capital Goods Price Index (Q1) - 20 May: The index rose 0.5% qoq/1.6% yoy, driven primarily by prices for residential construction.
External Migration (Apr) - 21 May: ? Adjusting for seasonal effects, a net 3,100 people migrated to New Zealand in April, taking the annual net inflow to 28,065.
Tourism (Apr) - 21 May: The number of tourist arrivals fell 19.3% mom in April following a 13.6% mom rise in March. Compared to last April, the number of tourist arrivals was 6% lower.
REINZ House Sales (Apr) - 22 May: The number of house sales rose 1.2% mom (s.a.) in April, following 6 consecutive months of growth of 3.5%-7.5%mom.The median sale price in April was $189,000 - 6.2% higher than a year earlier.
Government Budget - 23 May: Due to the improved growth outlook, the operating surplus for 2001/02 (excluding revaluation and accounting adjustments) is now estimated to be $2.3bn - a $1.1bn improvement on the December estimate. And a forecast surplus of $2.3bn in the 2002/03 fiscal year also compares favourably with the $1.8bn forecast made in December. As a result, the 2002/03 bond borrowing programme has been scaled back to $3.4bn, compared with the initial estimate of $5.1bn.
Building Consents (Apr) - 24 May: The total number of new dwelling consents issued increased 9.9% mom in April, following a 4.7% decline in March. The number of dwelling consents issued was 29.6% higher than a year earlier.
Overseas Merchandise Trade (Apr) - 27 May: A provisional merchandise trade surplus of $19m was recorded in April, compared with a surplus of $349m in April 2001. The annual trade surplus was $536m, compared with a surplus of $865m in March and a deficit of $561m a year earlier.
Producer Price Index (Q1) - 28 May: Average input prices fell 0.1% qoq (due to lower meat and crude oil prices), but were 2.8% higher than a year earlier. Average output prices rose 0.4% qoq and were 3.1% higher than a year earlier. Higher prices for electricity generation, logs and wool were partially offset by lower agriculture prices.
NBNZ Business Survey (May) - 31 May: General business confidence fell to +7% (net optimism) in May from +14% in April. However, firms remain more confident about their own activity, with a net 39% expecting an improvement in their own business activity. Retailers' pricing intentions eased slightly to +29 from +32 last month - the lowest level recorded this year.
Building Work Put in Place (Q1) - 31 May: Building work fell by 4.4% qoq in Q1 following 6% rise in Q4.
Wholesale Trade Survey (Q1) - 31 May: Wholesale sales rose 0.4% qoq in Q1.
The key event during the month was the hawkish RBNZ statement on the 15th. While the Bank tightened by only 25bps (the market had priced a significant chance of a 50 bpsmove), it lifted its projection of the peak in the cash rate from 6.0% to 6.75%. That led the market to price a 50bps rate hike in August, following an expected 25bps move on 3 July. However, the speed of the appreciation of the NZD has since led to a moderation in rate hike expectations. The Kiwi had risen from 0.4480 to 0.4570 over the first half of May and increased to 0.4800 by the end of the month - a move that can partly be attributed to global USD weakness and partly to attractive NZ interest rate differentials. On trade-weighted basis the NZD appreciated by 4.2% during May. Yields at the long end of the curve rose from 6.72% at the beginning of the month to a high of 6.94% on 15 May, driven mainly by US yields. The long bond ended the month at 6.74% as the US rallied over the second half of May. The 10 year NZ/US spread traded in a relatively narrow 165-174 bps range.
The Labour Party has maintained its big lead in the opinion polls and the probability of an early election (late July/early August) has risen significantly, as the split of the junior coalition partner, the Alliance, continues to threaten the stability of the Government. The latest Colmar-Brunton poll showed Labour at 51% support, National at 32%, the Alliance Party at 2%, ACT unchanged at 5%, the Greens up at 5% and NZ First at 3%.
Ulf Schoefisch, Chief Economist,
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