July 2002 in Review
Data Flash (New Zealand) July 2002 in Review
KEY GLOBAL DEVELOPMENTS AND FINANCIAL MARKETS
US equity markets looked over the edge and blinked during July. In the middle of last week the S&P 500 fell below the 800 level for the first time May 1997. Needless to say, at that point the technical picture looked truly horrible. Since that point, however, the market has managed to stage a quite remarkable recovery - rising 14%in 6 trading sessions to finish the month above 900. While the recovery of the market is welcome, ironically it comes at a time when the economic data are beginning to crack. Most importantly, the 3.8% fall in durable goods orders for June and the fall in the Chicago PMI for July to 51.5 reflect a renewed downturn in business sentiment. Not surprisingly in the present environment, consumer confidence is also beginning to fall. If the consumer cracks, then a double dip US recession looks ever more likely. Of course, the US data are not all pointing in one direction. There are signs the labour market is improving. Weekly jobless claims fell back to 362,000 in the third week of July. This could translate into a reasonable gain in non-farm payrolls for July.
Still, the market has concluded that the odds of a Fed rate cut have increased significantly. The Fed funds futures are pricing about a 50% chance of a rate cut before the end of the year. In light of this and the weakness in equities over the month, it is perhaps surprising that the USD has actually made reasonable gains in July. In the case of the Euro, this may partly reflect disappointment over some of the recent European data. French consumer confidence has fallen, the German IFO has dipped to 89.9 (previously 91.3) and retail sales are falling. All in all, this is not an environment where central banks are likely to consider tightening. Indeed, the Swiss central bank actually eased last week.
KEY NEW ZEALAND DATA AND EVENTS
ANZ Commodity Prices (June) - 3 July: The average foreign currency price of New Zealand's commodity exports fell by 1.0% mom in June on the back of lower dairy prices. With the NZD appreciating, the NZD price index fell 6.3% mom, to be 24.2% weaker than a year earlier.
RBNZ OCR Review - 3 July: As widely expected, the RBNZ raised the OCR by 25bps to 5.75%. However, the accompanying press statement was significantly less hawkish on future interest rate developments than the May Monetary Policy Statement, which had projected short rates to rise to 7% by early next year. The Bank stated that the rapid rise of the NZD would lower inflation pressure going forward and therefore reduce the extent to which interest rates would have to tighten over coming months.
Motor Vehicle Registrations (June) - 3 July: Total registrations rose by 8.6% mom in June (s.a.), reversing a 8.7% fall in May. New cars recorded a 14.3% increase, while registrations of used cars were up 4.7%.
Retail Trade (May) - 9 July: The value of retail sales fell 1.2% mom in May, partially reversing April's 2.6% gain. Turnover was 7.8% higher than in April 2001.
ANZ Job Ads (June) - 11 July: The number of newspaper job advertisements rose by 0.3% mom in June following a 3% decline in May.
Quarterly Survey of Business Opinion (July) - 11 July: Business confidence fell to -2% (net respondents) from +23% in late March. However, firms continue to be more upbeat about their own prospects, with a net 24% expecting an improvement in trading activity during Q3 (down from +34% last quarter). Capacity utilisation remains at a historically high level of 90.6%, while investment and employment intentions increased. The skill shortages indicator deteriorated to +39% from +33%, while pricing intentions declined only from 32% to 26%.
International Consensus Forecasts (July) - 15 July: The Index of growth for NZ's 14 largest trading partners remained at 2.8% for the 2002 year and at 3.5% for 2003.
Consumer Price Index (June quarter) - 15 June: The CPI increased by 1.0% qoq in Q2, lifting the annual rate of inflation to 2.8% from 2.6%. Key upward contributions were made by petrol prices and international airfares. Tradeables inflation was 1.4% qoq, with the annual rate unchanged at 2.5%. Non-tradeables inflation was 0.6% qoq, lifting the annual rate to 3.0% from 2.6%. The weighted median of annual price changes rose to 3.0% from 2.6% in Q1.
REINZ House Sales (June) - 18 July: The number of house sales fell 3.0% mom (s.a.) in June, following a 1.8% decline in May. The median sale price in May was $184,000, with the 3 month average up 7% yoy.
Long-term Migration (June) - 19 July: Adjusting for seasonal effects, a net 2,930 people migrated to New Zealand in May, taking the annual net inflow to 0.85% of the population.
Tourism (June) - 19 July: The number of tourist arrivals was down 0.7% mom in June and up only 3% on June 2001. The number of outbound tourists was up 1.0% mom in June and down 0.7% yoy%.
Overseas Merchandise Trade (June) - 25 July: A provisional merchandise trade surplus of $293m was recorded in June, compared with a surplus of $148m in June 2001. The annual trade surplus was $459m.
Consumer Confidence (July) - 25 July: Net optimism, as measured by the TV1 Colmar-Brunton poll, declined from +26% in June to +14%.
Building Consents (June) - 26 July: The number of new dwelling consents increased by 6.2% mom in June, following a 6.0% decline in May. The number of dwelling consents issued was 13.6% higher than a year earlier.
NBNZ Business Survey (July) - 31 July: General business confidence fell to -22% (net respondents) in July from -7% in June. However, a net 27% of firms still expect an improvement in their own business activity and investment and employment intentions have remained above historical averages. Retailers' pricing intentions eased to +19% from +25 last month.
The month started with the RBNZ announcing another 25 bps rate hike on 3 July, but pointing to a downward revision to its future interest rate projections, due to the unexpected strengthening of the NZD. As the world equity market downturn added to global growth worries over the remainder of the month, the market gradually priced out the chances of a tightening in August. That occurred despite a concurrent fall of the trade weighted NZD index to levels below the RBNZ's assumptions included in the May Monetary Policy Statement (the Kiwi fell from 0.4860 at the beginning of the month to 0.4700 on 31 July, while the TWI declined by 4% from 55.3 to 53.5). A flow of negative news about the domestic economy (greater-than-expected fall in farm incomes, slowing housing market, weak confidence) added to the markets' sentiment.
As the US bond market rallied in response to renewed concerns about the economy and rumours about further Fed easing, NZ bond underperformed and spreads reached new highs. The 10 year NZ/US spread rose from +183 bps at the beginning of July to a peak of 204 bps on 26 July, before finishing the month at +193 bps. Domestic 10 year yields finished the month at 6.51%, down from 6.64% on 1 July.
As widely expected, New Zealand re-elected a Labour-led minority government on 27 July. However, there was a mild swing towards the centre-right in the overall vote. Labour increased its share of the vote and will have 52 seats in the 120 member Parliament. Its coalition partner, the Progressive Coalition (which was formed after the split of the previous coalition partner, the Alliance), will only add two MPs to that, leaving the Government 7 seats short of an absolute majority. The latter had been a serious prospect at the beginning of the campaign.
Rather than attempt to enter into formal coalition arrangements with another party, the Prime Minister, Helen Clark, has expressed her preference for a minority government. Ms Clark has headed a minority government since 1999, with support from the Greens on confidence and occasional support from other parties on individual pieces of legislation. The Greens have already assured Ms Clark of support in Parliament for the formation of the new Government. However, the Greens have also announced that support would be withdrawn if the Government went ahead with its plan to lift the moratorium on the commercial use of genetic modification. That decision is due in October 2003. While the Greens' stance has been criticised as potentially holding the Government to ransom over a single issue, Saturday's election result has provided the Prime Minister with a fall-back option in the form of the United Future party. That party increased its support significantly during the final 10 days of the campaign and now has a sufficient number of MPs to be able to provide the required support for the Government should the Greens withdraw. United has declared that it would be open to such an arrangement.
The strong showing of United was part of the fragmentation of the centre-right vote. NZ First also benefited from that trend (+6%), while the National Party reached a low of 21% (-9%). The National Party is blaming its poor showing on its lack of preparation for an early election, mistakes in the campaign strategy, as well as a general lack of a mood for change.
Ulf Schoefisch, Chief Economist,
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