Sunday, June 7, 2009

Australian & New Zealand Weekly : Australian Markets Premature in Pricing 2010 Hikes

Week beginning 8 June 2009

  • Australian markets premature in pricing 2010 hikes.
  • Westpac-MI Consumer Sentiment to gauge June mood.
  • Australian data focus: housing finance and employment data due.
  • New Zealand: RBNZ to wait and see before further rate cuts.
  • New Zealand data: building work, terms of trade, retail sales due.
  • US data focus: trade deficit, Beige Book, retail sales, consumer sentiment due.
  • Key economic & financial forecasts.

Despite an avalanche of data and RBA communication, markets have been relatively stable over the last week. They are flirting with only one rate cut in the final quarter and continue to price in 100-125 bp's of rate hikes in 2010. In response to our reading of the Governor's latest Statement we pushed back our timing of the next rate cut to September from August but expect that cumulative cuts (probably including at least one 50bp) will total around 100bp's before rates reach their low. This 'fine tuning' of the rate cycle will be important although our much more significant observation is that rates will be on hold in 2010 in direct contrast to market pricing.

The details of the Governor's Statement on June 2 gave us some encouragement that our expectation of further rate cuts may have some legs despite market pricing: "the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy" is a much more direct remark than we saw in the May Statement: "in assessing whether further reductions in the cash rate are required over the period ahead". It is possible that this wording could be in place to dissuade markets from pricing in even more rate hikes next year or even late this year. Recall that when the RBNZ indicated that rates may have bottomed, curves steepened further and the Bank had to then issue a Statement indicating that rates were unlikely to rise until late 2010 at the earliest. The RBA would not like to be pushed into that corner and we expect would never give such explicit guidance. Better to maintain an easing bias even if it is not expected to be acted upon.

We also saw a repeat of the critical remark, "Continued progress in restoring balance sheets is essential for a durable recovery”. Emphasis on the risks from balance sheet deterioration should not be ignored. The current surge in financial markets appears to have masked the potential problems with balance sheets that are likely to be emerging in response to the collapse in global activity and associated spillover to employment and profits in the last two quarters.

Recall that the IMF increased their estimates of write downs associated with exposures to US borrowers from $1.5tr in October 2008 to $2.7tr in April 2009. In addition the IMF provided a first estimate of potential losses of those entities lending to European counterparties of $1.2tr. In discussions I have had over the last two weeks in Europe with those folks close to bank balance sheets in both Europe and the US there is ongoing concern that further balance sheet problems are likely to emerge once the growth boosts from the fiscal stimulus and the one off recovery of production levels (as inventory overhangs are cleared) have passed.

With momentum in the 'euphoria' trade likely to have more time to run, particularly as those original doubters now feel the need not to miss out, the type of balance sheet evidence that would disturb the RBA is probably some months away.

Australia's national accounts for the March quarter emphasise how difficult it has become for the authorities to assess Australia's current economic performance. There are three large distortive forces - the collapse in AUD and commodity prices in the second half of 2008 which has made it difficult for the statistician to calculate trade volumes from nominal data (note the 3.9ppt's contribution to GDP growth from net exports over the last two quarters). Imports are estimated to have collapsed by nearly 15% while final demand slowed by only around 1% - very suspicious indeed! Another distortive force is the impact on consumer spending of the huge one off payments from the government in the December quarter ($8.7 bn); March ($5bn) and the funds expected in the June quarter ($4.5bn).Finally, the effect the first home owners grant may be having on the current signals of a strong housing recovery need to be taken into account.

What we did see was a 1.1% contraction in employees' compensation (the sharpest fall since 1983Q2); a 6.3% fall in business investment; a 5.6% fall in dwelling investment; and a 1.3% contraction in private final demand. Clearly these private spending signals are disturbing and consistent with a fairly dismal outlook for growth through 2009.

Net exports are now likely to subtract from growth through the rest of 2009 (rising AUD; statistical revision of import collapse; export contraction as impact of resources capacity and rural surge fades); we also expect ongoing weakness in business investment and labour incomes. Further, the strength of the housing recovery will be tested by credit availability for multi-unit developments and the phasing out of the first home owners grant. We expect negative growth for the next three quarters of GDP averaging around 0.5% while growth in 2010 will be restricted to 1% - hardly an environment for the RBA to be tightening in 2010 or seeing any substantial risk of over easing in the second half of 2009.

Our figuring behind our expectation of further rate cuts hinges on the signals from contracting demand and our leading indicators correctly pointing to a sharp rise in the unemployment rate. That domestic scenario will be in the context of ongoing global weakness. That profile still appears to be on track although the convincing evidence is likely to be delayed for some months. In the mean time the RBA will remain on hold; and maintain an easing bias, if only to dissuade markets from pricing in more rate hikes in 2010, but will eventually respond to rising unemployment and disappointing global growth.

We are a little concerned that the Bank may be putting too much emphasis on China. Speeches and Statements depict an increasing optimism about China. We are concerned about the durability of China's surge without clear evidence that the fiscal infrastructure/ bank lending package is spreading to the private sector. Lack of reliable data for the private sector is also a concern.

If we are wrong and the RBA is in fact on hold we still would argue strongly that the growth signals for 2010 will keep rates on hold in 2010.

Australia: Data Wrap

May TD-MI inflation gauge

  • The TD-Melbourne Institute inflation gauge fell 0.3% in May following a flat result in April and 0.1% fall in March. Sources of lower prices cited included rents, holidays and alcohol. These were partially offset by price rises for fruit and vegetables, books, newspapers and magazines, and household supplies. Annual growth in the gauge fell to 1.5%yr from 2.1%yr previously, the lowest in the gauge's history (annuals since Aug-03).
  • The report noted that dwelling rents fell 1.5%mth to be down 4.5% over the past three months. Whilst we agree with other evidence that suggests rent pressures are beginning to ease, and may be beginning to see outright falls for new lease agreements, it is too soon for these falls to drive declines in the total pool of all rents. We estimate that new leases only affect around 5% of the total pool of all rents. We have long suspected that the inflation gauge is placing too much weight on new rental agreements settled in the month. Our own modelling of the CPI rents component shows a long 18 month lag between new rents and the movement in the CPI component (which represents the pool of all rents paid), which is consistent with the average outstanding lease agreement running for around 18 months.
  • As it stands, with the fall in the May inflation gauge, 3mth growth plunged to -0.38% from 0.61% previously, well down from the 1.25% 3mth pace seen three months prior in February. On the surface, this suggests a weak Q2 headline CPI pace. However, we must caution that the gauge's predictive ability for headline inflation was well wide of the mark in Q1 (a massive overestimate) and a reversal of that error in Q2 would see a significantly higher Q2 headline CPI than Q1's 0.1%qtr result. The weak monthly gauge over the past three months does however support our view that the relatively 'high' underlying inflation pace of 1.1%qtr in Q1 was temporary and softer quarterly underlying inflation will be seen in Q2. Also supporting this view, three month annualised growth in the trimmed mean of the inflation gauge fell to -2.2% in May from 2.5% in April and 5.0% three months prior in February. Our current expectation for Q2 underlying inflation is 0.7%qtr (vs 1.1% prev) cutting the annual rate to 3.8%yr from 4.2%yr previously.
  • The detail of the gauge in May continues to portray a broad based easing of price pressures. Prices rose in 25 items (vs 25 prev), were unchanged in 49 items (vs 45 prev) and fell in 16 items (vs 20 prev). This gave a net balance of 9 price rises, up from a net 5 rises previously, but the second lowest net balance since Jan-08, down from 12 a year ago, and well below the 6mth average net of 17.2 and 12mth average net of 18.9 rises.

Apr retail sales

  • Retail sales rose 0.3% in April after a 2.2% rise in March. Sales are up 6.8%yr and are 4.8% higher than their Nov level last year (i.e. prior to fiscal stimulus payments).
  • The April result was slightly below consensus forecasts of a 0.5% rise. However, there was a wide range on forecasts for the month reflecting uncertainty over the timing of fiscal payments. This uncertainty makes it difficult to discern how much of the result reflects a temporary fiscal boost and how much may be a genuine firming in demand. Despite this, the pattern of sales by store type does tentatively suggest there may be some easing in the consumer caution that has dominated since the middle of last year.

Q1 business indicators

  • The Business Indicators, as expected and consistent with private sector surveys, reported weak economic conditions in the March quarter. Incomes are under pressure, firms are running down inventories and sales are contracting.
  • Inventory levels declined by 1.2% in the March quarter, following a revised 1.5% fall in Q4. That will see inventories add just 0.1ppts to quarterly growth, which is in line with our forecast of a neutral impact.
  • Incomes weakened in the quarter, with company profits falling by 7.2%, wage income declining by 0.4% and unincorporate profits contracting by 3.7%.
  • The 'real sales' measure declined for a third consecutive quarter, falling by 1.5% in March.

Apr dwelling approvals

  • Dwelling approvals rose strongly by 5.1% in April with significant upward revisions to previous months. The increase was well above expectations of a 2% gain.
  • The rise brings dwelling approvals more in line with the strong gains signalled by other indicators. The mix also points to a more convincing upturn: private houses drove the April rise, jumping 7.2%.
  • Private house approvals are trending higher across all of the major states, with average growth over the 3mths to April of 2.7% in Vic and Qld, 1.9% in NSW and 0.4% in WA.
  • The value of renovation approvals also jumped sharply by 9.2% in April, the strongest rise since July 2008. However, the value of non-res building approvals continues to fall, down 8.6%mth, although the trend decline is now flat.
  • Overall, the dwelling approvals data shows the upturn in demand already apparent from housing finance data and new home sales is translating into increased new building. The credit crunch may be restraining and/or delaying the rise but it isn't preventing it altogether. The upturn won't be enough to prevent sharp falls in construction in H1 of 2009 but should see a solid bounce back from Q3. How well this is sustained into 2010, when first home buyer demand starts to wind down is now the critical question.

RBA policy announcement

  • As we expected, the RBA kept rates on hold at 3.00%. The Statement provided a balanced assessment of the risks in both the economic and financial outlook. It recognizes evidence of recovery in the developing world (particularly China), although there is caution regarding prospects for the developed world - with balance sheets at the heart of the matter.
  • As with preceeding Statements, the highly stimulatory stance of policy is emphasized, but there was a very direct statement in the final paragraph: "Nonetheless, the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed."
  • We continue to expect that the deteriorating state of balance sheets in the major economies is likely to significantly constrain the pace of recovery, a development inconsistent with the overly exuberant response of global equity/commodity markets. We expect the RBA has the same concerns.
  • The two main catalysts that will see the Bank deliver on its easing bias will be the anticipated adverse developments in the major economies, and the likely substantial deterioration in the Australian labour market.
  • For now, the ongoing exuberance in global financial markets and the volatility in domestic labour market data is likely to delay the timing of the Bank's next rate cut beyond our initial August call. We still expect rate cuts totalling as much as 100bps, but would now not expect the next move until September/October.

Q1 current account balance

  • The Q1 current account deficit fell to $4.6bn from $6.4bn (consensus $5.4, WBC $4.5). Using our revised forecast of Q1 GDP, this cuts the deficit to 1.6% of GDP from 2.2%. Net exports will add 2.2ppts to growth, much higher than expected. Our Q1 GDP forecast is now +0.3%qtr.
  • The nominal trade balance improved again on the back of extraordinary weakness in import volumes.
  • Export values reversed their Q4 strength, with price declines offsetting a rise in volumes. As expected, non-rural goods bore the brunt, falling 15.3% in value in the quarter. Rural volumes jumped notably, with the bounce back from drought pushing annual growth up to 22%.
  • Import values collapsed 10.7%, led by a 7% drop in volumes. By use, consumption goods volumes fell 10.3% and capital goods volumes fell 7.1%. Intermediate imports volumes are down 10.3%.
  • Services exports were resilient, with travel and other services rising, and transportation services flat. Outward travel services were also sound, but they lagged inbound traffic.
  • The net income deficit narrowed to $9.6bn. Income credits fell $985mn from Q4, which was swamped by a $1.1bn decline in income debits.
  • The funding of the reduced deficit improved relative to the difficulties seen in Q4, with portfolio inflow returning as the banks made use of the government guarantee to tap a variety of offshore markets.


  • The Australian economy expanded by 0.4% in the March quarter. That was far better than originally expected and a remarkable outcome given the negative global backdrop. Annual GDP growth has slowed to 0.4%, down from 3.4%yr in March 2008.
  • A word of caution: the statistician is struggling to estimate activity at a time of large price movements. The expenditure estimate has annual GDP growth a healthy 1.8%, the income measure shows that the economy stalled over the last year, while the production measure points to a recession (-0.6%qtr in Q4 and -0.9%qtr, -0.6%yr in Q1).
  • The unprecedented cash transfer from the Commonwealth Government to households allowed consumers to lift spending despite a decline in wage income. Compensation of employees contracted by 1.1%qtr, the weakest result since 1983Q2. With the unemployment rate still likely to rise to 8% or more, household incomes will be under pressure when the cash transfers come to an end.
  • Exports, up 2.7% in the quarter, were a major positive. That saw net exports add 2.2ppts to growth, with imports down 7.0%. Going forward, exports will be constrained by weak global demand and imports will decline at a slower pace.
  • The key message from the accounts is that the Australian economy has experienced a major negative income shock from the global recession and the terms of trade decline. The loss of national income was apparent with nominal GDP, which declined for the second consecutive quarter.
  • Companies have responded to the loss of profitability by aggressively cutting investment from a very high level. This, and a downturn in housing construction, saw domestic demand contract by 1.0% in the March quarter.
  • With downward pressure on incomes to continue, as the terms of trade declines further in Q2, we expect domestic demand to contract throughout 2009, potentially by 2.5%.
  • This will see GDP weaken over coming quarters, particularly if net exports become neutral. We could see GDP decline by around 1%yr at the low point later this year.
  • Beyond near-term weakness, the likely acceleration in public demand as Commonwealth infrastructure spending rises, and the boost from very low interest rates, will support economic activity from late 2009. This points to the economy expanding in 2010, albeit at a sub-trend pace.

Apr trade balance

  • The trade position was worse than expected, falling from a revised March surplus of $2.302bn to an April deficit of $91mn (consensus +$1700mn, WBC f/c +$350mn).
  • Exports saw a price-led collapse as we expected, down 11.3% in a month where the RBA AUD commodity price index fell 18.1%. This incorporated an estimated 20% iron ore price fall from March to April, implying prospects of a downward revision when contracts are finalised. Trend export growth is a weak -2.5%mth with the rural uptrend flattening and non-rural trend growth at -3.8%mth.
  • Imports were more resilient than expected, indicative of some volumes consolidation after a precipitous plunge of 14% over the prior two quarters. This volumes fall had taken their deterioration beyond that typically associated with the demand slowdown seen to date, so continued import volume consolidation is likely over the next six months. While imports fell 1.7% in April, the 7% AUD/USD rise would have hit prices more, so volumes by implication rose. Trend imports growth was -2.0%mth with consumption goods -0.8%mth and capital goods -1.8%mth.
  • With export volumes likely to be more constrained going forward by the weak global demand backdrop, and a slowing in the pace of fall in import volumes likely, net exports are likely to quickly revert from their strong +2.2ppt contribution to Q1 GDP growth, reverting to a moderate drag as soon as Q2.

Round-up of local data released last week

Date Release Previous Latest Mkt f/c
Mon 1 May TD-MI inflation gauge 0.0% -0.3% -
May AiG PMI 30.1 37.5 -
Q1 company profits -8.0% -7.2% -4.5%
Q1 inventories -1.5% -1.2% -1.4%
Apr retail sales 2.2% 0.3% 0.5%
Tue 2 RBA policy announcement 3.0% 3.0% 3.0%
Apr dwelling approvals 6.3% 5.1% 2.0%
Q1 current account balance, AUDbn -6.4 -4.6 -5.4
Q1 net exports contribution, ppts cont. 1.7 2.2 1.0
Wed 3 Q1 GDP -0.6% 0.4% -0.2%
Thu 4 Apr trade balance, AUDbn 2.3 -0.1 1.7

New Zealand: Week ahead & Data Wrap

Cause for a pause

Next Thursday's Monetary Policy Statement comes at an interesting juncture for the New Zealand economy. Activity is still contracting in most parts of the world, but at a slower pace than seen earlier this year - and for a change, the outlook for growth doesn't seem to have deteriorated further since the last OCR review. Meanwhile, financial markets are sending a clear signal that they believe the worst-case scenarios for the global economy have been avoided.

It's clear from the RBNZ's recent comments that they are sceptical about the near-term prospects for recovery, and they remain biased towards further easing if needed. Even so, we think there is enough reason to leave the OCR unchanged this time - if their scepticism turns out to be justified, they retain the option of cutting rates again later in the year, while if the 'green shoots' turn out to be genuine, they will have little to regret by not easing further.

Developments since the April OCR review have been mixed - which in itself is a notable development. Monthly indicators in most parts of the world suggest that manufacturing, trade and house prices have been falling at a slower pace in recent months. To be clear, this is hardly a sign of strength - the best we can say is that a global economy that was in freefall at the end of last year has since deployed the parachute. But the change in momentum is a necessary first step towards recovery.

The latest Consensus Forecasts for New Zealand's major trading partner growth were revised down slightly for this year to -2.3%. However, forecasts for 2010 were steady at 2.0%, which will test the RBNZ's view that there are further downward revisions to come as we get closer to the date.

The improvement in market sentiment has been more dramatic. Investors are moving away from safe havens such as US Treasuries and are prepared to take on more risk - share prices have soared, commodities (and commodity currencies) have risen, and some measures of credit spreads have narrowed to levels last seen before the collapse of Lehmans last September. Before discounting these moves as overdone, remember that when the 'green shoots' started to emerge, financial markets were starting from a much darker place than the real economy, having priced in the possibility of another Depression. And the breadth of the rebound across markets makes it hard to dismiss.

The 'green shoots' have been appearing in the domestic economy as well. Fiscal stimulus is forecast to add 3.3% to GDP over the next year, twice what was previously projected. House sales have surged from their lows and prices have probably risen in recent months, due to historically low mortgage rates. A sharp rise in net migration has also helped, with fewer New Zealanders trying their luck in Australia. The unemployment has risen only modestly - in fact, as of March there were still 0.8% more people in work compared to a year earlier. And export commodity prices have held up better than expected, although the recent tit-for-tat subsidies on dairy products by Europe and the US are cause for concern.

Against these reasons for optimism, there is the fact that financial conditions have continued to tighten since April, via a stronger exchange rate and higher long-term interest rates. The New Zealand dollar has risen 30% against the US dollar since early March, defying the RBNZ's projection that it would continue to fall to near-record lows and remain there for several years. The trade-weighted index is now just below its long-term average - not exactly stretched in historical terms, but perhaps an uncomfortable place to be in the context of a severe global recession.

But should the RBNZ be trying to resist this move? Currencies, along with other market prices, are sending a very clear signal about where investors think the global economy is heading: that the worst-case scenario has been avoided and the early conditions for a recovery are in place. If the RBNZ is correct that the market's optimism is overdone, then we could expect the NZD to reverse of its own accord. And if the market is correct in anticipating a pickup in world demand, it's unlikely that a higher currency would cancel this out completely - it doesn't work that way in theory, and it hasn't been observed in our recent history. Either way, the RBNZ can afford to wait and see how this develops.

As for long-term rates, we think the RBNZ is more concerned about borrowers unnecessarily locking themselves in at those higher rates, when there are much lower rates available for shorter terms. The rise in long-term rates actually makes this an easier sell, as the gap between a one-year and a five-year fixed rate is now getting towards 250bp, compared to just 70-80bp in early March, when borrowers first began to rush into longer fixed terms.

We expect the RBNZ's interest rate projections to be lower than the track published in the March MPS - but crucially, higher than what they would have projected internally in April. We expect the 90-day rate projections to bottom out at around 2.5% by yearend, which would be consistent with one or two more 25bp cuts, but with no urgency as to the timing. The RBNZ is likely to keep its April commitment to keeping rates at or below current levels until the latter part of 2010. Even if the 'green shoots' of recovery are genuine, the RBNZ can afford to wear a few positive surprises, as the economy is no longer running at or close to full capacity.

Round-up of local data released last week

Date Release Previous Latest
Thu 4 Jun May ANZ commodity prices 2.6% 2.7%
Fri 5 Jun Q1 wholesale trade survey -2.5% -5.9%

Data Previews

Aus Jun Westpac-MI Consumer Sentiment

Jun 10, Last: 88.8

  • The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 4.3% in May from 92.7 in April to 88.8 in May. The key factor was consumers' reactions to a bleak Federal Budget.
  • The June survey is in the field from June 1 to 7. Consumer sentiment is likely to be impacted by: the surprise positive Q1 GDP result that saw Australia escape a 'technical' recession; the continued rally in global equities (ASX up about 4% since the May survey and now up over 25% from March lows); a strong surge in the AUD, up about 5c US since the last survey (consumers typically view rises as positive); and continued signs of firming in housing markets. The RBA left interest rates on hold again at its June 2 meeting. The rapid rise in swine flu cases - poised to pass 1000 cases nationally - may also impact on sentiment.

Aus Apr housing finance

Jun 10, Last: 4.9%, WBC f/c: -1.0%

Mkt f/c: 1.6%, Range: -1.0% to 5.5%

  • Following a rapid 30% rise in new lending to owner-occupiers over seven months, we expect a consolidation in the Easter affected month of April, forecasting a 1.0% decline.
  • Housing finance has rebounded sharply in response to very low interest rates and the boost to the First Home Buyer scheme. With the standard bank variable mortgage rates tumbling to just 5.85% - the lowest since 1968 - the upswing in housing finance has gained momentum and breadth.
  • It is upgraders that are driving the finance upswing in 2009, in that they account for the majority of the overall increase. That is no great surprise given their much larger weight. Lending to upgraders is up 17% so far in 2008, while there has been some loss of momentum in the First Home Buyer segment after a surge late in 2008.

Aus May employment chg

Jun 11, Last: +27.3k, WBC f/c: -35k

Mkt f/c: -30k, Range: -50k to -15k

  • April saw a surprise 27.3k jump in employment. But remember this is noisy data from month to month based on a small sample size of 0.24% of the population. Abstracting from the April noise, the trends continued to deteriorate with annual growth falling to 0.26%yr (lowest since Jun-93) and the monthly trend (-4.3k) in decline for five months.
  • Signals from our preferred leading indicators of employment (Westpac-ACCI Labour Market Composite, detrended job ads, and our business survey composite labour demand indicator) continue to imply a more rapid jobs deterioration ahead. Indeed, despite a recent slight improvement, the labour demand indicator points to a fall in 3m MA jobs growth to around -13k from the current -2.5k pace. Thus we look for a 'payback' -35k jobs fall, slowing trend growth to +0.05%yr.

Aus May unemployment rate

Jun 11, Last: 5.4%, WBC f/c: 5.7%

Mkt f/c: 5.7%, Range: 5.5% to 6.0%

  • The April jobs surge, and a 0.1ppt dip in the participation rate to 65.4%, amplified the impact on the unemployment rate which unexpectedly fell 0.3ppts to 5.4%. Smoothing through the monthly headline volatility, the trend unemployment rate rose to 5.5% from 5.4%, up from 4.1% a year ago.
  • Analysis of the historical participation rate reaction to jobs movements and prior unemployment rate changes shows that sharp falls in the unemployment rate are usually followed by higher participation, but weak employment is usually accompanied by lower participation. On balance, we expect the fall in May jobs to dominate over any positive participation influence from April's lower unemployment rate, lowering the participation rate to 65.3%. This would only partially offset the forecast jobs fall, returning the unemployment rate to 5.7%.

NZ May REINZ house prices %yr

Jun 8-12, Last: -1.4%

  • Sentiment toward the housing market has clearly shifted since the beginning of the year, largely courtesy of lower mortgage rates. According to REINZ data, seasonally adjusted house sales have jumped 74% in five months, from rock-bottom to roughly average. The number of days to sell a house has fallen back to 2007 levels. And house prices have been rising not falling.
  • Data from a major real estate agency in the Auckland region suggest that housing activity may have taken a bit of breather in May. However, on the whole we expect the REINZ data to show still solid momentum.
  • With longer term mortgage rates on the rise, we expect the pick up in activity in the first half of 2009 will be short lived. We predict a return to low sales and gentle price declines in H2 2009.

NZ Q1 Building work put in place

Jun 9, Last: -6.5%

  • The seasonally adjusted volume of residential building work fell 13.4% in the December 2008 quarter, to be 31.5% lower than a year ago and the lowest since the March 2002 quarter. In contrast, non-residential building work held up, lifting 1.6% in the quarter, although was 2.2% lower than a year ago.
  • Indicators suggest there was no improvement on the building front in Q1. Dwelling consents point to another large decline in residential construction in Q1 (in the order of 10%), as well as a sizeable contraction in non-residential building work.
  • Consent data heading into Q2 suggests that the pace of decline in building activity should begin to ease in the second half of the year.

NZ Q1 terms of trade

Mar 10, Last: -0.9%, WBC f/c: -6.6%, mkt f/c: -3.8%

  • We expect a 7.8% drop in export prices, dominated by a 23% fall for dairy products. Milk powder that was stockpiled late last year was sold down in Q1, boosting volumes but crystallising the fall in contract prices paid to Fonterra. Crude oil prices are also expected to be down 21%, though their share of exports has fallen sharply in the last six months.
  • Our forecast of a 1.3% fall in import prices masks a wide range of outcomes, with prices for commodity items such as oil, fertiliser and steel down 20% or more, while the weaker NZD pushed up prices for manufactured items.
  • The decline in the terms of trade is long overdue, with contracted dairy prices holding up for longer than anticipated. We expect the terms of trade to fall by 10% over this year.

NZ RBNZ Monetary Policy Statement

Jun 11, Last: 2.50%, WBC f/c: 2.50%, mkt f/c: 2.50%

  • W e expect the RBNZ to pause at next week's OCR review, with any further cuts likely to be delayed until later this year.
  • Economic conditions have shown some early signs of improvement. The global economy is contracting at a slower pace, and New Zealand is expected to benefit from fiscal stimulus, rising migration and firm commodity prices.
  • The market's optimism about a global recovery has had the effect of pushing the NZD and long-term interest rates higher. The RBNZ appears to believe that this confidence is misplaced, but we think they can afford to wait and see whether their scepticism is justified.

NZ Apr retail sales

Jun 12, Last: -0.4%, WBC f/c: 0.2%, mkt f/c: 0.2%

  • The second tax cut came into effect on 1 April giving a boost to disposable incomes. We suspect much of this was saved given dented household balance sheet and slackening labour market. Also, ACC premium (national accident insurance) increases at the same time dulled the increase in take home pay.
  • Credit card data fell 2.8% in March and bounced back 2.3% in April. Retail sales did not follow credit cards down in March so we discount the technical bounce in April credit card transactions. The 0.3% growth in the broader electronic transaction (includes eft-pos cards) data is likely to be a better guide.
  • Core sales (+0.3%) are expected to slightly outperform total sales as we expect the latter to be pulled down by another drop in motor vehicle sales. Lower petrol prices (-0.8% in the month) leaves more to spend elsewhere.

US Apr trade deficit to widen again

Jun 10 , Last: -$27.6bn, WBC f/c: -$29.0bn

  • The trade deficit widened for the first time in eight months in March, reflecting unfavourable volume shifts on the export side (weaker capital, consumer, auto and aircraft sales to foreign customers) compounded by a rising import prices and falling export prices. Even so, the deficit remains at around levels last seen eight years ago.
  • In April, import prices rose a further 1.6% as oil prices kept climbing and the US dollar weakened. However import volumes probably slipped reflecting the subdued demand environment. Export prices also rose, but only by 0.5%. Factory shipments were down modestly in April, suggesting export volumes were soft. Aircraft deliveries were down too.
  • We expect a flat export outcome and a 1% rise in imports to widen the deficit again to $29.0bn in April.

US May retail to post an auto and gas driven bounce

Jun 11, Last: -0.4%, WBC f/c: 0.5%

  • Retail sales fell in both March and April, reflecting subdued core retailing, falling gasoline prices (weighing heavily on service station sales) and in March, weaker auto sales (they were about flat in April).
  • Despite the bankruptcy of Chrysler and at the end of the month, GM, industry data showed a surprising 6% jump in unit sales. Discounting (and some fleet sales) will mean that retail auto sales won't post a similar-sized gain, but they should still be a positive. Also, gasoline prices rose about 20% on average last month, which will boost the headline retail number.
  • But core retailing excluding autos and gasoline looks to have been about flat, helped by tax breaks and rising confidence, but still constrained by the growing savings imperative. We expect a 0.5% rise in total sales, 0.1% for ex auto and -0.1% for core.

Westpac Institutional Bank


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