Key Global Developments And Financial Markets
Data Flash (New Zealand)
June 2002 in Review
Falling equity prices, accounting scandals and world cup soccer have dominated June. On the corporate governance front, WorldCom shocked markets late in the month with the news that it had capitalised operating expenses and thus massively overstated profits. Indeed, the operating profit for the past year will be restated as an operating loss. Not surprisingly, the company was hammered with the share price falling virtually to zero and its debt trading at a few cents in the dollar. The news has raised fresh concerns over the quality of US accounting standards and corporate governance and cast a pall over equity markets as June drew to a close.
With US equity markets close to testing their post-September 11 lows it is not surprising that the money markets have essentially given up on the prospect of Fed rate hikes this year. The December 02 Eurodollar contract has rallied more than 60bp since the end of May, while at 4.8% the 10Y UST yield has fallen close to its lowest point for the year. The USD has also suffered as the gloss has been removed from the US story. The Euro has traded very close to parity, rising to its highest level in more than two years. Even the Yen has been able to make substantive gains against the Greenback, prompting intervention from the BoJ on a number of occasions in the past few weeks.
The US equity weakness comes despite the data pointing to the US recovery being on track. Jobless claims are trending down, pointing to further - albeit gradual - improvement in the labour market, while 41,000 non-farm jobs were created in May. Consumer confidence has ticked down somewhat, but it remains at high levels and is highly correlated with employment, which appears to be improving. Leading indicators such as the May ISM reading of 55.7 are positive. It would appear that the issue is the likely pace of the recovery and the still very low equity risk premium priced into the market, especially given uncertain economic and political environment.
KEY NEW ZEALAND DATA AND EVENTS
With no RBNZ meeting this month, the key non-data event this month was the announcement of a General Election to be held on 27 July - some four months ahead of schedule. Towards the end of the month the RBNZ was in the limelight, however, with Finance Minister Cullen attacking the Bank for not interpreting the Policy Targets Agreement as the Government had intended. As far as data is concerned, the following were the major economic releases.
ANZ Commodity Prices (May) - 5 June: The average foreign currency price of New Zealand's commodity exports fell by 1.7% mom in May on the back of lower meat and dairy prices. With the NZD surging, the NZD price index fell 5.2% mom to be 19.3% weaker than a year earlier.
Motor Vehicle Registrations (May) - 5 June: Total registrations fell by a sharp 9.2% mom in May (s.a.), with used car sales down 12.2% mom and new car sales down 5.6% mom.
Retail Trade (Apr) - 10 June: The value of retail sales rose 2.6% mom in Apr following a decline of 0.5% in April. With the timing of Easter impacting on spending patterns, a 0.9% mom decline is likely to have occurred in May.
ANZ Job Ads (May) - 11 June: The number of newspaper job advertisements fell 2.9% mom in May following a 6.2% rise in April. The timing of Easter has had a substantial impact on this data.
International Consensus Forecasts (June) - 13 June: The Index of growth for NZ's 14 largest trading partners ticked up 0.1pp to 2.7% for the 2002 year. Growth expectations for 2003 remained at 3.5%.
Food Prices (May) - 14 June: The food price index fell 0.8% mom in May, with fruit and vegetables, meat and general groceries all declining. The annual rate of food price inflation fell to 4.0% from 5.2%.
REINZ House Sales (May) - 20 June: The number of house sales fell 1.8% mom (s.a.) in May, the first decline since September. The median sale price in May was $188,000, with the 3 month average up 7.9% yoy.
Long-term Migration (May) - 21 June: Adjusting for seasonal effects, a net 3,400 people migrated to New Zealand in May, taking the annual net inflow to 31,231. The inflow is expected to peak at around 35,000.
Tourism (May) - 21 June: The number of tourist arrivals rose 15.4% mom in May following a 19.3% mom fall in April, with the timing of Easter again playing havoc with the data.
Pre-Election Economic and Fiscal Update - 25 June: Very minor changes were made to the Treasury's forecasts to take account of the stronger NZD. No change was made to the bond programme.
Consumer Confidence (Q2) - 25 June: The Westpactrust consumer confidence index rose marginally to 121 from 120.2 in Q1.
Building Consents (May) - 26 June: The total number of new dwelling consents issued declined 5.9% mom in May, following a 9.7% rise in April. The timing of Easter and `lumpy' apartments consents explain the volatility.
Balance of Payments (Q1) - 27 June: An annual current account deficit of $2.7bn was reported, compared with market expectations of $4.0bn, reflecting strong growth in tourist receipts and a smaller than expected investment income deficit. Nonetheless, the deficit is expected to widen this year as the trade balance worsens.
Overseas Merchandise Trade ?(May) - 28 June: A provisional merchandise trade surplus of $496m was recorded in May, compared with a surplus of $668m in May 2001.
NBNZ Business Survey (Jun) - 28 June: General business confidence fell to -7% (net optimism) in June from +7% in May. However, a net 33% of firms still expect an improvement in their own business activity. Retailers' pricing intentions eased slightly to +25 from +29 last month - the lowest level recorded since November.
GDP (Q1) - 28 June: GDP (production measure) rose 1.1% qoq in Q1 (in line with market expectations), following growth of 0.7% qoq in Q1. The RBNZ forecast growth of 1% qoq in its May Monetary Policy Statement - a forecast that the Bank felt was subject to upside risk. GDP in Q4 was 4.0% higher than the same quarter a year earlier while the annual average increase over the calendar year was 3.2%.
Consumer Confidence (June) - 30 June: The Colmar Brunton poll showed a small fall in net consumer optimism from +27% to + 26%.
After initially pricing in a good chance of a 50bp rate hike at the 3 July meeting following the RBNZ's hawkish statement on 15 May, the key trend over June was a gradual pricing out of such a move, with the market even beginning to contemplate the possibility that the RBNZ might not hike at all. The continuing pricing out of rate hikes in the US was a key factor driving the reassessment which had begun to occur in May on the back of strong gains in the NZD over the latter half of that month. The NZD ended June much as it began in trade-weighted terms, although further gains were made against the USD. The yield on 10Y NZGBs ended the month at 6.65% - 9bps lower than their opening levels - reflecting developments in the US. However, the NZ market underperformed its US counterpart, with the spread to USTs rising from 171bps to 185bps. Finally, a 3.3% decline in the NZSE40 represented a good result next to a 7.2% fall in the S&P500 and a 9.5% fall in the Nasdaq.
POLITICS With a General Election called for 27 July, the Labour Party has maintained its big lead in the opinion polls. Indeed, on current polling, the Labour Party has a chance of being elected with an absolute majority - a rare outcome in the world of MMP. The latest Colmar-Brunton poll, taken at the end of the month, showed Labour at 51% support, National at 30%, the `old' Alliance Party at 0.5%, the new breakaway Anderton Progressive Coalition at 1%, ACT at 5%, the Greens at 7% and NZ First at 3%.
Darren Gibbs, Senior Economist