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October 2001 in Review

Data Flash (New Zealand)
October 2001 in Review


For much of October perhaps the most interesting aspect of global financial markets has been the willingness of equity markets to discount the current period of weakness and rally strongly on expectations of a rebound in growth in 2002. It was only in the last few days of the month that this confidence began to crack as the increasingly negative tone of the data took its toll. The month kicked off with the Fed delivering a 50bps rate cut and retaining an easing bias. For the most part, this enabled the Eurodollar strip to retain a bid tone for the month as the market slowly moved to price in a funds rate of 2%. The resilience of equity markets may have been a key factor in stopping Eurodollars pricing more aggressively. The bond market received a boost at the end of the month from the Treasury's decision to halt issuance of the 30Y bond. This prompted a massive flattening of the curve.

Elsewhere, the Japanese outlook continues to deteriorate. Unemployment rose to a record 5.3% in August, while IP was down 2.9% in September. This fall was much worse than expected, with industrial production down 4.3% in the quarter. The European picture is considerably better, of course, though still deteriorating on balance. The key German IFO survey was worse than expected and opens the way for an ECB easing in early November. The French INSEE survey, on the other hand, has held up better than expected.

After September's rollercoaster of activity, October was unusually calm in foreign exchange markets. In fact, one month vol in most currency pairs fully retraced the substantial spike seen post September 11. This 'twilight zone' appeared to reflect the actions of a range of market participants that, after establishing positions post the September 11-related flurry, sat back to assess whether conditions were panning out as expected. Overall risk taking is still at very low levels. The EUR weakened consistently through the month, to close with a net loss of around two big figures, with the overhang of long positions perhaps proving too much to bear. The NZD, meanwhile, actually closed a little higher than where it started (0.4137 against 0.4046).


The key local data releases and events were:

ANZ Commodity Prices (Sep) - 2 Oct: ? The foreign currency price of New Zealand's commodity exports rose 1.1% mom in September - the second consecutive rise. The result was driven largely by higher prices for lamb and beef. Reflecting the depreciation of the NZD, the NZD price index increased by 3.4% mom in September. RBNZ OCR Review - 3 Oct: ? After surprising markets with an uncharacteristically bold and unscheduled 50bps cut on 19 September, the RBNZ conformed with market expectations and left its OCR unchanged at 5.25%. In an accompanying statement, the RBNZ concluded that it will have "an opportunity for a fuller review of the outlook for economic activity and inflation, and the risks around that outlook", when it prepares its 14 November Monetary Policy Statement - a statement that left the door wide open to at least a 25bps cut. Motor Vehicle Registrations (Sep) - 3 Oct: Total registrations fell 3.1% mom led by a 4.9% decline in new vehicle registrations (to a level 2.9% lower than a year earlier). However, registrations are still running 10% higher than a year earlier, as a result of a consumer-led 18% yoy rise in registrations of used vehicles.

Government bail out of Air New Zealand - 4 Oct: The Government announced the details of its rescue package for Air New Zealand, worth a maximum of NZD885m, and giving the Government up to 83% ownership of the airline.

Retail Trade ?(Aug) - 8 Oct: Total nominal retail sales fell 0.6% mom in August. The market had expected growth of 0.3% mom. The decline was fully accounted for by an unusual 8.7% fall in department store sales. Statistics NZ attributed the decline to store closures and an easing of sales growth in the remaining stores. ANZ Job Ads (Sep) - 8 Oct: The number of job ads fell 2.1% in September following a 2.6% fall In August. Although, the series remains close to its all-time record high, and is consistent with continued solid employment growth, a further softening in job advertising appears likely over coming months.

QSBO Business Survey (Q3) - 11 Oct: The first major business survey to be released incorporating responses to the 11 September US terror attacks revealed a massive plunge in business confidence - the headline measure declining from +1 to -44. Firms' expectations of their own trading prospects also fell, but remained well in positive territory.

Overseas Merchandise Trade (Aug) - 11 Oct: The preliminary August trade deficit was revised up slightly to NZD107m from NZD97m previously.

Food Price Index (Sep) - 15 Oct: The FPI rose 1.8% mom to be 7.8% higher than a year earlier - the highest rate of food price inflation since June 1990. Meat, fruit and vegetable, and grocery prices all rose sharply.

Consumers Price Index (Q3) - 15 Oct: ? In line with RBNZ and market expectations, the CPI increased by 0.6% qoq in Q3, reducing the annual rate of inflation from 3.2% to 2.4%.? The weighted median of quarterly price changes was 0.3% qoq (up from 0.2% qoq in Q2). Colmar-Brunton Consumer Confidence (Oct) - 15 Oct: Confidence fell to -10 in October from +1 in September, foreshadowing a further moderation in consumer spending.

REINZ House Sales (Sep) - 19 Oct: The number of house sales fell 7.3% mom in September to be 16% higher than a year earlier.

External Migration (Sep) - 19 Oct: A net inflow of 2,300 migrants was recorded in September. As a result, the net inflow over Q3 was 5,500, compared to a net outflow of 2,500 in Q2. Tourist arrivals declined 5.6% mom, reflecting the first impacts of the 11 September terrorist attacks.

Building Consents (Sep) - 25 Oct: Following a 15% surge in August, the number of dwellings consents issued fell 9.2% mom in September to be just 2.6% higher than a year earlier. The solid trend in non-residential consents remained in place.

Overseas Merchandise Trade (Sep) - 26 Oct: A preliminary deficit of NZD53m was reported for the month of September - a much better result than the NZD365m deficit expected by the market. The positive surprise was due to extremely low imports during the month, reflecting weakening demand, declining import penetration and the exchange rate used to convert foreign currency denominated invoices. NBNZ Business Survey (Sep) - 31 Sep: The October survey confirmed the trend evident in the earlier QSBO survey with general business confidence plunging from +13 to -19 and firms' expectations regarding their own trading activity declining from +39 to +18 - a level consistent with 2% annual GDP growth.


After beginning the month with just a 25bps cut priced in for the RBNZ's 14 November meeting, over the course of the month, the accumulation of poor global (and increasing domestic) data led the market to fully price a 50bps cut, with some chance of a further cut in early 2002. As a result, the curve became more inverted between 90 days and 3 years and steepened between 3 years and 10 years. The 10Y NZ/US spread ended the month a little higher than it began reflecting the sharp rally in US markets after the local market closed on 31 October (the opening of the local market on 1 November saw this difference eliminated). The NZD had a better month, closing 2.2% up against the USD and 2.4% up on a trade weighted basis, while the local equity market benefited from the recovery in US markets and the government bail out of Air New Zealand, to end up 5.3% on its opening level.


Despite appointing a new leader, National, the major opposition party, failed to gain ground on the Government this month. The latest Colmar-Brunton poll, perhaps the most widely followed, showed Labour up 2pp to 46% support, National down 1pp to 39%, Alliance unchanged on 2%, ACT unchanged on 3%, the Greens down 1pp to 5% and NZ First up 1pp to 3.5%. Darren Gibbs, Senior Economist

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