new zealand economics market focus · pdf file · 2014-10-03new zealand economics...

ANZ RESEARCH

NEW ZEALAND ECONOMICS MARKET FOCUS

12 May 2014

INSIDE Economic Overview 2 Budget 2014 Preview 6 Interest Rate Strategy 9 Currency Strategy 11 Data Event Calendar 13 Local Data Watch 15 Key Forecasts 16

NZ ECONOMICS TEAM

Cameron Bagrie Chief Economist Telephone: +64 4 802 2212 E-mail: [email protected] David Croy Head of Global Markets Research, NZ Telephone: +64 4 576 1022 E-mail: [email protected] Sharon Zöllner Senior Economist Telephone: +64 9 357 4094 E-mail: [email protected] Mark Smith Senior Economist Telephone: +64 9 357 4096 E-mail: [email protected] Steve Edwards Economist Telephone: +64 9 357 4065 E-mail: [email protected] Carrick Lucas Strategist Telephone: +64 4 802 2357 E-mail: [email protected] Con Williams Rural Economist Telephone: +64 4 802 2361 E-mail: [email protected] Sam Tuck Senior FX Strategist Telephone: +64 9 357 4086 E-mail: [email protected]

SURPLUS CLEARANCE ECONOMIC OVERVIEW The good news story across the economy continues to percolate, though we still view the economic expansion as fraught with frictions and tensions. We continue to highlight the importance of microeconomic developments in such an environment. The RBNZ is expected to reaffirm the soundness of the financial system, although the current global environment is providing headaches to the export sector via an elevated NZD. The Budget will toe the tight fiscal line, a necessary pre-requisite for capping OCR increases and improving nationwide saving. An emerging area to watch is signs of decline in other soft commodities: forestry prices have been the latest to follow dairy. Watch this space.

BUDGET 2014 PREVIEW We expect Thursday’s Budget numbers to be market friendly with economic growth forecasts shaded up and net debt to peak at around 27% of GDP. We’re also expecting few changes to the bond program. With no material changes to broad fiscal macro settings expected, our focus will be on microeconomic initiatives.

INTEREST RATE STRATEGY We prefer taking profit on NZGS geographical compression trades as the global “search for yield” reaches exhaustion point. Long-end yields remain biased higher over the medium term and we see little fundamental value in NZGS 10yr yields at 4.25%. Strategically we favour adding to core shorts by fading the rally. We’re a little more cautious from a tactical perspective, and instead favour NZGS puts or payer swaptions to help manage duration. Thursday’s Budget is expected to be market-friendly with few changes to the bond programme envisaged, supporting our view for further gradual swap spread widening.

CURRENCY STRATEGY While yield remains an important support variable for the NZD, at these levels it’s attracting the ire of the RBNZ and is material for inflation trends. We see real prospects of only one more hike on offer before a pause. Weakness in soft commodity prices has broadened and prospective ECB action should be euro negative (in the short term) and USD supportive at a time when USD pessimism seems to have run its course. This combination shifts our mind-set from buying dips to fading rallies. We expect the relative budgetary positions of the Australian and New Zealand governments to continue to support NZD/AUD. The key pivot level remains that of support at 0.9130.

THE ANZ HEATMAP Variable View Comment Risk profile

GDP 3.5% y/y for 2015

Q1

Confidence gauges suggest strong momentum, financial

conditions still supportive despite elevated NZD.

Positive Negative

Neutral

Unemployment rate

5.5% for 2015 Q1

Following the economy but ongoing volatility.

Positive Negative

Neutral

OCR 3.75% by Mar 2015

+25bps in the next meeting, then a pause. Moderate OCR

endpoint.

Up Down

Neutral

CPI 1.9% y/y for 2015

Q1

Contained near-term. Upside risks to domestic inflation

countered by high NZD impact.

Positive Negative

Neutral

ANZ Market Focus / 12 May 2014 / 2 of 19

ECONOMIC OVERVIEW

SUMMARY

The good news story across the economy continues to percolate, though we still view the economic expansion as fraught with frictions and tensions. We continue to highlight the importance of microeconomic developments in such an environment. The RBNZ is expected to reaffirm the soundness of the financial system, although the current global environment is providing headaches to the export sector via an elevated NZD. The Budget will toe the tight fiscal line, a necessary pre-requisite for capping OCR increases and improving nationwide saving. While a solid Q1 result for retail spending is expected, more recent signs indicate households are not getting too carried away. An emerging area to watch is signs of decline in other soft commodities: forestry prices have been the latest to follow dairy. Watch this space.

FORTHCOMING EVENTS

REINZ Housing Market Data – April (Monday, May 12, 3:00pm). Likelihood of a small climb in monthly sales volumes. Increasing inventories are expected to contribute to falls in annual house price inflation (currently 9.3% y/y) over the next few months.

ANZ Truckometer – April (Tuesday, May 13, 10:00am).

Food Price Index – April (Tuesday, May 13, 10:45am). A 0.4% monthly increase is expected (+1.4% y/y).

RBNZ Financial Stability Review – May (Wednesday, May 14, 9:00am). Sound financial system, although the RBNZ will strike a cautionary note on the global financial market backdrop and the high NZD. The RBNZ will reaffirm that the high-LVR speed limits are working and will remain in place for a while yet.

Retail Trade – Q1 (Wednesday, May 14, 10:45am). A 0.9% quarterly rise in retail volumes is expected, with core volumes up 0.5%.

BNZ Business NZ PMI – April (Thursday, May 15, 10:30am). A small fall from the 58.4 March reading is expected.

NZ Budget – 2014 (Thursday, May 15, 2:00pm). This will signal a return to Obegal surplus by 2014/15, with limited fiscal leeway. See our preview on page 6.

BNZ Business NZ PSI – April (Monday, May 19, 10:30am). Services sector sentiment expected to fall hover Small falls from 58.3 March reading expected.

WHAT’S THE VIEW?

We’re still seeing good growth across the economy, but frictions and tensions continue to percolate. The housing market is clearly slowing, though the supply-side residential response is picking up. The high NZD remains somewhat problematic. We use the term “somewhat” because it’s hard to grizzle too much with an $8+ dairy payout this season and a $7 figure for the coming season. However, we’re starting to see further cracks in the commodity price story, with forestry prices falling sharply of late. Watch this space. Job creation is stellar, as is the mobilisation of people into the labour force; good news for income growth and supply side capacity all round. Wage growth is picking up, and someone needs to educate some commentators on the differences between the Labour Cost Index and the Quarterly Employment Survey. The former controls for the quality and quantity or work and is closer in spirit to a unit labour cost measure than a measure of overall wage growth. Movements in average hourly earnings from the QES are sensitive to compositional shifts in employment patterns which will affect overall wage movements from this measure. The increase in average weekly earnings to a six year high (+6.4% y/y) confirms labour income growth within the economy is on the up despite wage inflation not taking off, a plus for the durability of the expansion.

Growth in the order of 3.5 to 4% still looks on offer this year.

The 2014 Budget takes centre stage this week with rosy figures expected. The focus will no doubt once again be on prudent fiscal management, a more productive government, rebuilding Christchurch, and lifting NZ’s international competitiveness. While an Obegal surplus for 2014/15 is expected to remain on track, there will be little margin for error. Spending restraint will remain a cornerstone for the return to surplus next year and projected rising surpluses over the projection period. Restrictive fiscal policy and rebuilding of fiscal buffers will help monetary policy, though if you want to get real about taking pressures off the currency through this channel you need surpluses in excess of 5% of GDP. That’s politically difficult to aspire to and deliver on. Nonetheless, amidst fiscally profligate peers, NZ’s fiscal accounts will be a source of envy.

We’ll be more interested in the microeconomic nuances out of the Budget. We’re not expecting magic potions, but expect the broad agenda to be supportive in terms of expanding the supply-side capacity of the economy. With such capacity now


ECONOMIC OVERVIEW

sitting around 2.75% y/y and demand growth in excess of 3.5%, there is still a mismatch to manage. Equally important will be the collection of small initiatives centred around Christchurch and Auckland; the wider NZ economy can ill afford housing shortages or rebuild activity to dominate the macroeconomic picture. Good microeconomic initiatives can relieve pressure. A failure to deliver these will leave the RBNZ with little choice but to be more active in curtailing the demand side of the equation.

The half-yearly RBNZ Financial Stability Report (FSR) is expected to reaffirm that the overall financial system is sound. Banks remain well capitalised and well funded. The RBNZ are likely to take a more cautionary tone regarding the current benign global financial market backdrop, with interest rate spreads, market volatility and measures of risk at very low levels. This global environment is likely to be behind some of the strength of the NZD as investors search for yield. We expect the FSR to reaffirm that the high-LVR speed limits are working and signal no intention to drop them in the immediate future, as this would mean a higher interest rate profile and further pressures on the NZD.

FIGURE 1. NZD/USD VS DAIRY AUCTION PRICES

0

1000

2000

3000

4000

5000

6000

0.40

0.50

0.60

0.70

0.80

0.90

04 05 06 07 08 09 10 11 12 13 14

USD

/tonneN

ZD

/USD

NZD/USD (LHS) Average winning price from GDT (RHS)

Source: ANZ, GlobalDairyTrade, Bloomberg

While the NZ commodity story remains positive, we are starting to detect some signs of slippage across soft commodity prices. Dairy prices have fallen more than 20% since February, and while they appear to be finding a base, some weakness in meat and forestry prices is becoming more apparent. While we expect a March lift in the goods terms of trade, this will be the peak, with trends in commodity prices over the next few months to reveal the extent of subsequent falls to come. The situation needs to be watched closely for the NZD should typically run hand-in-hand with the terms of trade.

Thursday’s retail trade is one of the first major inputs into Q1 GDP. We expect a reasonably solid quarter for overall retail spending, underpinned by lifting vehicle volumes. Retail ECT spending managed a 0.7% rise in Q1, but surging vehicle registrations (up 6.6% in Q1, 24% y/y) point to a firmer reading for retail spending, with our expectation of a broadly flat retail trade deflator expected to contribute to a 0.9% lift in volumes. Risks lie to the upside. There are a number of supports to household spending volumes at present. The high NZD is making imported retail goods attractive, and strengthening housing activity is also lifting demand for consumer durables, with the consumer mood also very buoyant. While wage growth remains low, increasing employment is boosting labour incomes.

FIGURE 2. RETAIL SPENDING AND LABOUR INCOMES

-10

-8

-6

-4

-2

0

2

4

6

8

10

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Annual

% c

han

ge

Retail Volumes Real Labour Incomes

Source: ANZ, Statistics NZ

According to the QES, total gross annual labour earnings rose to a 6-year high in March, or a close to 8-year high after accounting for inflation. While the Q1 retail figures should hold up reasonably well, overall retail card spending has been coming off the boil over the last few months, with the April ECT data showing a further moderation in retail outside of hospitality. This is not necessarily a bad thing, as the economy still has a structural need to rebalance away from spending towards earning. Upcoming readings for consumer sentiment will show whether this is likely to be a temporary respite.

The QES report also highlighted a pick-up in services sector paid hours, which, along with rebounding construction sector activity, is expected to underpin a circa 1% q/q Q1 GDP result. Cement production for the March quarter (+3.2% q/q, +12.7% y/y) showed a strong pick-up in the top half of the North Island, consistent with our internal anecdotes. Canterbury production hit a record high despite earlier anecdotes pointing to a flattening off in activity.


ECONOMIC OVERVIEW

Sentiment gauges over the next few weeks are expected to remain upbeat. We expect a robust April PMI print, although the scaling back in (still lofty) activity expectations in the April ANZ Business Outlook survey suggests a small fall is likely. Strengthening construction activity is supporting manufacturing activity aligned to the construction sector. The high NZD, however, is not, although manufacturing sector export intentions from the ANZ Business Outlook have remained firmly in positive territory so far. Services sector sentiment from next week’s April PSI is expected to remain elevated, consistent with a broad-based economic expansion.

FIGURE 3. GDP AND THE HEAVY TRAFFIC INDEX

28500

30500

32500

34500

36500

38500

820

920

1020

1120

1220

1320

02 03 04 05 06 07 08 09 10 11 12 13 14

Real 9

5/9

6 $

mn

Index

Jan04=

1000

Heavy traffic index (LHS) GDP (RHS) Source: ANZ, Statistics NZ

Traffic volumes remain a timely gauge for economic activity, with the April Truckometer due to be released on Tuesday. The Heavy Traffic Index has proved to be a timely and useful indicator of GDP, and suggests a robust Q1 print of around 1%. The Light Traffic Index is trending up, with the latest reading to provide insights on the degree of momentum over the mid-year period.

Housing market data should show a market coming off the boil. Increasing listings on the market earlier reported by Barfoot & Thompson and realestate.co.nz suggest that the supply side of the market is responding to the uplift in prices – and/or that expectations of future capital gains are moderating. This is likely to cap price rises going forward. Last week’s speech by RBNZ Deputy Governor Spencer suggests the Bank remains reasonably confident that pressures in the housing market are gradually abating. However, we reiterate that the credit channel of monetary policy needs to be watched closely. While floating mortgage rates have more or less followed the OCR upwards, fixed mortgage rates have hardly moved in the key 2-year window.

FIGURE 4. HOUSING SUPPLY (SEASONALLY ADJUSTED)

0

2

4

6

8

10

12

14

16

18

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Mon

ths

(3 m

onth

ave

rage)

Auckland Nationwide Canterbury Source: realestate.co.nz, Barfoot & Thompson, ANZ

The Government are also moving quickly on the supply side, with the announcement of an additional 41 Special Housing Areas in a bid to fast-track development and ease Auckland’s housing shortage. So far 63 areas have been created, with an estimated capacity of 33,500 dwellings, close to the 39,000 target by September 2016 under the Auckland Housing Accord. Progress is being made, with the provision of enough land and connecting infrastructure to build 25,000 dwellings. While construction activity is picking up in Auckland (and elsewhere), it is from a low base, with strengthening net immigration making the provision of housing a moving target. Meeting these housing targets represents a formidable challenge to the construction sector, and it will have significant implications for resource allocation and inflationary pressures within the economy. An uplift in productivity in the construction sector would confer significant benefits not only to potential homeowners but also to the wider economy.

A small lift is expected for April food prices, with grocery food prices rebounding following March discounting. So far, high commodity export prices have had only a limited impact on overall retail food inflation, with the high NZD and lack of global pricing pressures playing a role. Nevertheless, commodity price impacts have still been evident, with retail prices for milk, cheese and eggs up 7% over the last 12 months, and lamb prices up 15% on a year ago. Recent falls in commodity export prices suggest less upside risk to retail food prices, but this will depend on other factors, including retail margins. Next week we will present our April update from our Monthly Inflation Gauge, which will help show the extent to which localised increases in pockets of the economy are filtering through into generalised inflation.


ECONOMIC OVERVIEW

RECENT LOCAL DATA

GlobalDairyTrade auction. The average winning price fell 1.1% to USD3,950 / MT.

SNZ Labour Cost Index – Q1. Private sector salary and ordinary time wage rates rose 0.3% (+1.6% y/y).

SNZ Quarterly Employment Survey – Q1. Average private sector hourly earnings rose 0.7% q/q (2.9% y/y). Filled jobs rose 1.1% (2.6% y/y).

SNZ Household Labour Force Survey – Q1. Employment rose 0.9% q/q (3.7% y/y). The labour force participation rate rose 0.4% to 69.3% of the working age population, with the unemployment rate steady at 6%.

SNZ Electronic Card Transactions – April. Retail ECT spending rose 0.3% (+5.5% y/y). Core ECT spending rose 0.1% sa (4.8% y/y).

Crown Financial Statements – 9 months to March. There was an Obegal deficit of $1,664m, $199m worse than forecast in the HYEFU, although better than expected investment returns contributed to a better than expected operating surplus of $3.332m. Net core crown debt ($61.2bn) and gross core crown debt ($84bn) were marginally higher than forecast.


BUDGET 2014 PREVIEW

SUMMARY

We expect Thursday’s Budget numbers to be market friendly with economic growth forecasts shaded up and net debt to peak at around 27% of GDP. We’re also expecting few changes to the bond program. The fiscal stance will remain restrictive to the tune of 3% of GDP over the next four years, supporting lower-than-otherwise interest rates and helping to sustain the current expansion. With no lolly scramble expected, nor material changes in the broad fiscal macro settings versus those previously flagged, our focus will be on initiatives in the microeconomic arena: it’s steps in this area that are critical if a durable and elongated economic expansion is to unfold.

STEADY AS SHE GOES

We’re not expecting the 2014 Budget to deliver too many surprises with the market focused on:

The numbers themselves – big surprises seem unlikely.

Winners and losers – health and education will continue to get the lion’s share of new money.

The fiscal stance – relevant for monetary policy and likely to remain contractionary.

The “spirit” conveyed by microeconomic initiatives and their impact on productivity gains and the longevity of the current expansion.

The usual high notes will feature in the Budget at the macroeconomic level. It’ll be about a productive public sector, responsible fiscal management, and support for Christchurch et al. It’s all common sense stuff.

ECONOMIC AND FISCAL PROJECTIONS

We expect the Budget to flag a return to surplus in the 2014/15 fiscal year (albeit a wafer-thin surplus of around $100m) with the Crown then set to post larger and more consistent surpluses from 2015/16. The recent shortfall in tax revenue figures is likely to see the Treasury revise its forecast for the 2013/14 OBEGAL deficit to -1.3% of GDP (from -1.0% at December’s Half-Year Update). Core Crown tax revenues were tracking $800m behind HYEFU forecasts in the 9 months to March, although Treasury anticipates around half of this can be attributed to timing issues, and will be recouped by June. Despite the recent revenue shortfall, Treasury has indicated that a stronger-than-anticipated growth outlook will still allow for a return to surplus in 2014/15. Thus we expect the Treasury to shade up its GDP growth forecasts on the back of a strong domestic economy. Business and consumer

confidence continue to signal strong economic momentum, underpinned by a significant construction pipeline and rising net immigration. While the elevated NZD is likely to take off some of the shine, purchasing power within the economy has been supported by the terms of trade at 40 year highs.

FIGURE 1. UNDERLYING OPERATING BALANCE (OBEGAL)

-10

-8

-6

-4

-2

0

2

4

6

8

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

% o

f G

DP

HYEFU 2013 Budget 2014

Source: ANZ Research, Treasury

Spending restraint also remains a cornerstone behind plans to return to surplus, and projected rising surpluses. The Government is expected to maintain the allowance for new discretionary spending at $1bn per annum, with savings in lower priority areas continuing to be recycled into front-line services. Government spending is projected to fall below 30% of GDP in 2015/16 from 35% of GDP in 2011.

FIGURE 2. CORE CROWN REVENUE VS EXPENDITURE

24

26

28

30

32

34

36

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

% o

f G

DP

Revenue Expenditure


Health, education and superannuation will continue to be the main beneficiaries of overall expenditure growth, although we also expect to see some re-prioritisation towards defence, trade & enterprise, and potentially business R&D. Scope for additional cuts to ACC employee and motor vehicle levies could also free up funding in other areas.


BUDGET 2014 PREVIEW

Treasury projections are likely to show net core Crown debt peaking at a shade under 27% of GDP in 2014/15 as the books return to surplus. The Government will restate its commitment to long-run fiscal responsibility and we expect the Budget to again show net debt falling below 20% of GDP by 2020. This will provide a buffer against future economic shocks, reducing the risks of severe recession and the business uncertainty associated with such an outcome.

FIGURE 3. NET CORE CROWN DEBT

0

5

10

15

20

25

30

35

00 02 04 06 08 10 12 14 16 18

% o

f G

DP

HYEFU 2013 Budget 2014


Credit rating agencies and investors will of course take comfort from another fiscally responsible Budget, focusing on the return to surplus and the signalled fall in the net debt to GDP profile. This represents a remarkable turnaround from the 9.2% of GDP deficit recorded in 2011. Net debt remains low compared to global peers (the OECD average is 73% of GDP) and we note that even Australia faces at least another four years of fiscal deficits (albeit ANZ forecasts Australia’s net debt to peak at around 15% of GDP).

FIGURE 4. FISCAL IMPULSE (JUNE YEARS)

-3

-2

-1

0

1

2

3

4

97 99 01 03 05 07 09 11 13 15 17

% o

f G

DP

HYEFU 2013

Expansionary

Contractionary


The fiscal stance is expected to remain contractionary to the tune of 3.0-3.5% of GDP

over the next four years. Counter-cyclical fiscal policy continues to give monetary policy a helping hand, with inflation and interest rates lower than otherwise would have been the case. The move toward Crown surpluses will also help improve NZ’s saving shortfall and set a good example for the household sector to emulate. The Government’s partial asset sales programme now appears complete, though proceeds of $4.7bn look to have fallen slightly short of initial estimates for $5-7bn.

BOND PROGRAMME TO BE LITTLE CHANGED

We’re expecting few changes to the NZDMO’s overall bond tender programme, with cumulative gross issuance expected to remain at $26bn over the next four years (in line with HYEFU forecasts). This would see gross annual issuance unchanged at $6-7bn in each of the next four years.

June Years 2014/15 2015/16 2016/17 2017/18 Cum.

Gross Issuance 7.0 7.0 6.0 6.0 26.0

Redemptions 7.8 1.2 - 11.9 20.9

Net Issuance -0.8 5.8 6.0 -5.9 5.1

NZDMO Bond Programme forecasts

The NZDMO is likely to reiterate plans to issue a longer-dated Apr-2027 nominal bond in the 2014/15 fiscal year (likely prior to the Apr-2015 maturity), subject to market conditions. This would allow the current pace of regular nominal and linker issuance to be maintained into the 2014/15 fiscal year (around $300m of nominal bonds and $200m of linkers tendered each month).

FIGURE 5. NZ BOND PROGRAMMES (JUNE YEARS)

0

5

10

15

20

95 97 99 01 03 05 07 09 11 13 15 17

$bn

Nominal Bonds Linkers

Forecasts


FROM THE MACRO TO THE MICRO

With the broad fiscal parameters looking healthy, we’ll be focusing on initiatives in the microeconomic arena and in particular policy announcements that contribute to the overall productivity story and help sustain the current economic expansion. The New Zealand economy


BUDGET 2014 PREVIEW

continues to navigate a barrage of cyclical and structural challenges and opportunities, with frictions evident in a number of areas. In such an environment the microeconomic story becomes increasingly important. We’ll be looking for initiatives relating to education, skills development (i.e. coping with a city rebuild and more homes for Auckland), land supply, housing affordability, exporter support, more funds for R&D etc. Further improvements to savings policy (eg via tax signals) would be viewed as constructive,

adding to the thematic that such microeconomic tilts portray. Forget about big-bang stuff; we’re after a steady stream of small things that can add up to deliver economic muscle.

THE UPSHOT

Modern day Budgets tend to be bland and dry affairs: this one will be no different. Expect few surprises, numbers that are market-friendly, and a policy agenda that is pretty constructive.

March Years 2013/14 2014/15 2015/16 2016/17 2017/18

Real GDP (ann. ave. % chg.) 3.1 (2.7) 3.8 (3.6) 2.9 (2.7) 2.5 (2.0) 2.2 (2.2)

Nominal GDP (ann. ave. % chg.) 6.0 (6.5) 5.5 (4.9) 4.5 (5.2) 4.0 (4.0) 3.5 (3.7)

Current account deficit (% of GDP) -3.0 (-4.2) -4.5 (-5.5) -5.5 (-6.3) -6.0 (-6.5) -6.0 (-6.4)

Unemployment rate (March qtr, %) 6.0 (5.8) 5.4 (5.6) 5.2 (5.4) 5.0 (5.2) 4.8 (4.7)

CPI (ann. % chg.) 1.5 (1.4) 2.2 (2.4) 2.3 (2.4) 2.2 (2.3) 2.1 (2.2)

June Years 2013/14 2014/15 2015/16 2016/17 2017/18

OBEGAL - % of GDP -1.3 (-1.0) 0.0 (0.0) 1.0 (0.7) 1.4 (1.2) 2.2 (2.1)

Operating Balance – % of GDP 1.1 (0.7) 1.5 (1.3) 1.9 (1.9) 2.4 (2.4) 3.3 (3.3)

Core Crown Residual Cash - % of GDP -2.1 (-1.8) -1.5 (-1.5) -0.2 (-0.5) 0.6 (0.5) 1.2 (1.2)

Net Core Crown Debt - % of GDP 26.6 (26.3) 26.5 (26.5) 25.5 (25.8) 24.0 (24.4) 22.0 (22.3)

Bond Programme (Gross) 8.0 (8.0) 7.0 (7.0) 7.0 (7.0) 6.0 (6.0) 6.0 (6.0)

2014 Budget Economic and Fiscal Forecasts (HYEFU 2013 forecasts in brackets)


INTEREST RATE STRATEGY

SUMMARY

We prefer taking profit on NZGS geographical compression trades as the global “search for yield” reaches exhaustion point. Long-end yields remain biased higher over the medium term and we see little fundamental value in NZGS 10yr yields at 4.25%. Strategically we favour adding to core shorts by fading the rally. We’re a little more cautious from a tactical perspective, and instead favour NZGS puts or payer swaptions to help manage duration. Thursday’s Budget is expected to be market-friendly with few changes to the bond programme envisaged, supporting our view for further gradual swap spread widening.

THEMES

NZGS have benefitted from a come-back in the global “search for yield,” leaving us cautious in the near term. However, we prefer selling rallies and adding to long-term hedge cover on a longer term view. A low volatility environment favours optionality.

An OCR hike in June appears a done deal. An elevated NZD clearly reduces the odds of a follow-up hike in July, though we’re wary that mortgage rates remain low, bank margins have narrowed, and the domestic data pulse remains robust.

PREFERRED STRATEGIES – INVESTORS

We prefer adding to strategic NZGS shorts at current levels as the globally-inspired rally approaches exhaustion. However, we still remain cautious from a tactical perspective as NZGS continue to receive attention from global investors amidst a return in the global “search for yield.” Case in point – Italian and Spanish 10yr yields are trading at all-time lows below 3% (130bps below NZGS). While these levels appear to be divorced from fundamentals, the prospect of QE from the ECB adds to their allure. With volatility low, we favour optionality and believe investors should consider “payer swaptions” or “NZGS puts” to shorten duration. Friday’s $200m nominal bond tender (Apr-2020s expected) provides a potential trigger point for higher yields.

KEY VIEWS – FOR INVESTORS

GAUGE DIRECTION COMMENT

Duration Strategic Shorts

Yield biased higher but search for yield back. Consider options.

2s10s Curve Neutral / Steeper

Wade into steepeners sub 80bps with long-end yields at lows.

NZ-US 10yr spread Neutral

Take profit on NZ-US compression trades.

Swap spreads

Neutral / Wider

Mid-range. Budget to confirm limited NZGS supply backdrop.

Despite a risk that NZGS geographical spread compression could have further to run, we prefer

taking profit on NZ-US 10yr compression trades here at 1.63% as short-end spreads fail to keep pace.

FIGURE 1. NZ-US SPREADS

120

140

160

180

200

220

240

200

225

250

275

300

325

350

375

400

May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14

bps

bps

3rd bill futures spread (LHS) NZ-US 10yr spread (RHS)

Source: ANZ Research, Bloomberg

Thursday’s Budget is expected to be market-friendly with the Government on track to return to surplus in 2014/15 and few changes to the bond programme anticipated. We expect 2014/15 nominal and linker issuance will continue at a similar pace to H1, with the relatively limited NZGS supply backdrop supporting our view for further gradual widening in swap spreads.

We see limited downside for NZ front-end rates from current levels, with the 2 year swap rate expected to hold its 3.90-4.05% range. While an elevated NZD has the potential to limit the extent of rate hikes, we note that market expectations for future OCR hikes are now as much as 75bps below the RBNZ’s implied track from March (and below our own OCR endpoint forecast of 4.75%). Mortgage paying is likely to remain persistent given the 2 and 3 year fixed rate specials on offer, although carry-related receiving from offshore should continue to cap the topside. We’re neutral curve in the near term though look for opportunities to wade into 2s/10s swap steepeners towards 75-80bps.

PREFERRED STRATEGIES – BORROWERS

We continue to see decent value at the long end of the curve with the 10 year swap rate now below 4.80%. Implied forwards on term swap rates remain well below historical averages while the 5yr/5yr forward swap (a bellwether of value) has fallen 75bps since the start of the year. Borrowers should look to pay 10 year swap outright or consider “payer swaptions” with volatility still low. In contrast, we’re reasonably agnostic about value in the short-to-mid part of the curve, and borrowers will need to be discerning when adding to cover. Set targets and stick to them. We like adding to 5 year hedge cover below 4.40% and 7 year cover towards 4.55%. We continue


INTEREST RATE STRATEGY

to favour blend-and-extend strategies in light of recent curve flattening and with short-end rates higher (which embed the profit from short-duration hedges into longer duration hedges at a below-market rate).

KEY VIEWS – FOR BORROWERS

GAUGE VIEW COMMENT

Hedge ratio Majority hedged

Stay majority hedged. Blend and extend hedge cover.

Value Long end still cheap

Still value in hedging for terms of 5-10yrs.

Uncertainty Still high Geopolitical/positioning risks. NZD, dairy prices.

GLOBAL SCENE

Global yields continue to fall as the ECB flags a potential policy easing in June. While a cut to the ECB’s refi rate seems the most likely scenario, speculation of QE amidst the need for the ECB to lower the euro appears to be driving a come-back in the global “search for yield.” This has led to significant outperformance from higher-yielding peripheral bond markets, both in the Eurozone and further afield. In such an environment, NZGS 10yr yields have significant appeal to global investors. However, recent moves in yields could soon approach exhaustion point and we’re cognisant of how the “search for yield” ended in mid-2013 – with yields sharply higher.

FIGURE 2. 10YR SPREADS TO US YIELDS

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

NZ-US NZ-AU SPAIN-US ITALY-US

Source: ANZ Research, Bloomberg

US bond yields are also expected to remain anchored in the near term following soothing tones from Fed Chair Yellen in the past week. She reiterated that the US economy still needs support given considerable slack in the labour market, subdued inflation, elevated geopolitical risks, and a stalling housing market. While we wouldn’t fully discount yields breaking to the downside, we have increased conviction in our view that US bond yields will gradually normalise over the medium term. Speculative shorts have halved in the past fortnight. The US economy is experiencing a

solid bounce in Q2 activity with potential for 3.5% annualised GDP growth (after a weather-impaired Q1) – this week’s US retail sales and housing market data are expected to print on the positive side of the ledger. US CPI data is expected to show inflation lifting to 2% in April as temporary factors drop out, reducing fears about disinflation. Our strategy team expects to see a base in the US industrial cycle form around Q3 2014, which would place modest upward pressure on yields. Thus we expect 10yr bond yields to remain range bound between 2.55-2.80% in coming months while forecasting yields to rise above 3% by year end.

DOMESTIC SCENE AND MARKET EXPECTATIONS

RBNZ concerns over the high NZD have seen markets scale back expectations for future OCR hikes. We’ve long held the view that the NZD would remain elevated and signal a more muted tightening cycle. A higher NZD reduces the odds of a follow-up hike in July, but currencies can be fickle things and we believe the market is now under-pricing the extent of future OCR hikes. Market expectations are now 35-50bps below RBNZ projections through 2015 and almost 75bps by the end of the projection period.

FIGURE 3. OCR EXPECTATIONS

3.0

3.5

4.0

4.5

5.0

May-14 Nov-14 May-15 Nov-15 May-16 Nov-16

%

Market Pricing RBNZ (Mar) ANZ forecasts

Source: ANZ, Bloomberg

We’re yet to detect any notable turn in our lead indicators with the domestic activity outlook still robust – though signs of waning in some commodity prices amidst a high NZD and weakening in housing are on our watch-list. We’d also highlight compression in bank funding spreads (in 15-20bps since March) and aggressive competition in the mortgage market (with 2-3 year fixed rate specials back to late-2013 levels). An OCR hike in June is a done deal in our view. While we can see some economic cracks (the dataflow is no longer consistently strong), we nonetheless favour paying July OIS at 3.30% (which implies only a 20% chance of a follow-up hike assuming June is delivered).


CURRENCY STRATEGY

SUMMARY

While yield remains an important support variable for the NZD, at these levels it’s attracting the ire of the RBNZ and is material for inflation trends. We see real prospects of only one more hike on offer before a pause. Weakness in soft commodity prices has broadened (forestry prices have been the latest to follow dairy) and prospective ECB action should be euro negative (in the short term) and USD supportive at a time when USD pessimism seems to have run its course. This combination shifts our mind-set from buying dips to fading rallies. We expect the relative budgetary positions of the Australian and New Zealand governments to continue to support NZD/AUD. The key pivot level remains that of support at 0.9130.

TABLE 1: KEY VIEWS

CROSS WEEK MONTH YEAR

NZD/USD ↓ Sell on rallies Wider ranges and volatility beckon.

NZD/AUD ↔ Supported Ranging strength.

NZD/EUR ↔ ECB weakening EUR.

EUR to gain on fundamentals.

NZD/GBP ↔ Consolidating. GBP resurgence.

NZD/JPY ↓ Yen capitulation? Yen weakness.

RBNZ warnings and a broadening softening in commodity prices suggest further NZD/USD gains will be met with more supply going forward.

THEMES AND RISKS

ECB: attention turns to whether they will deliver the QE nuclear option or not. Something passive to weaken the euro doesn’t look credible.

NZD still on the RBNZ’s radar for monetary policy.

Soft commodity price declines are broadening. The evolution of declines requires careful attention.

Volatility continues to under-price risks.

TABLE 2: KEY UPCOMING EVENT RISK EVENT WHEN (NZT) LIKELY IMPACT

AUD: Business Conf. Mon 13:30 NZD/AUD ↓

NZD: Truckometer Tue 10:00 NZD/USD ↑

CNY: April data Tue 17:30 NZD ↑

AUD: Budget Tue 21:30 NZD/AUD ↑

USD: Retail Sales Wed 00:30 NZD/USD ↓

NZD: RBNZ FSR Wed 09:00 NZD/USD ↓

GBP: Employment Wed 20:30 NZD/GBP ↓

GBP: BoE Inflation report Wed 21:30 NZD/GBP ↓

JPY: Q1 GDP Thu 11:50 NZD/JPY ↓

NZD: Budget Thu 14:00 NZD/USD ↑

EUR: April CPI & Q1 GDP Thu 21:00 NZD/EUR ↑↓

USD: Empire Survey Fri 00:30 NZD/USD ↓

USD: Industrial Production Fri 01:15 NZD/USD ↓

USD: Philadelphia Fed Fri 02:00 NZD/USD ↓

USD: Yellen Fri 11:00 NZD/USD ↑

EXPORTERS’ STRATEGY

Patience is still our long-term mantra. However, those hedging immediate receipts should look at levels below 0.8550.

IMPORTERS’ STRATEGY

The RBNZ has ensured further gains will be hard fought, so moves above 0.87 look opportune.

DATA PULSE

The RBNZ reiterated the explicit link between the level of the NZD and the future path of interest rates. This should ensure further NZD strength is met with reducing yields, a self-regulating dynamic that suggests a “sell on rallies” approach.

The ECB sent EUR lower by stating they are ready to act. Fundamentally the EUR remains supportive, but the ECB is the clear driver. Tinkering will not turn the EUR: they need to deliver something material.

Global economic expansion is still running at a positive but sub-optimal pace. European, UK and US Service sectors showed solid, albeit uninspiring, momentum. A lack of surprises from activity indicators has also contributed to declines in volatility to historically low and attractive levels. See ANZ FX Insight: Time for NZD/USD protection.

The Australian economy continues to show signs of basing; however, it remains clear that the RBA is comfortably on hold. The Australian and New Zealand Budgets this week will highlight that it is not only monetary policy, but also the fiscal position that remains divergent in favour of NZD.

TABLE 3: NZD VS AUD: MONTHLY GAUGES GAUGE GUIDE COMMENT

Fair value ↔/↓ Above cyclical fair value. Yield ↔ Yield differentials priced. Commodities ↓ Soft commodities declining. Data ↔ RBA comfortably on hold. Techs ↑ Strong support below 0.92. Sentiment ↓ Different risk discounts applied. Other ↑ AUD has more surprise potential. On balance ↔ Supported.

TABLE 4: NZD VS USD: MONTHLY GAUGES GAUGE GUIDE COMMENT

Fair value ↔/↓ Still above fair value. Yield ↑ Short yield still favours NZD.

Commodities ↓ Early signs of broadening price declines.

Risk aversion ↓ NZD not pricing a risk discount.

Data ↔ NZ releases are strong and US releases ambiguous.

Techs ↔/↑ Short-term support at 0.85. Other ↓ US pessimism may have based. On balance ↓ Sell on rallies.


CURRENCY STRATEGY

TECHNICALS

FIGURE 1: NZD/USD DAILY CANDLES WITH RSI AND MA

The pivot level around 0.85 remains key to the NZD. The recent move to create a new cycle high near 0.8780, some 60 pips shy of kiwi’s post-float high, ensures that NZD will remain in demand while above this pivot level. However, let’s not lose sight of the long-term picture in these circumstances, and it is one of NZD/USD at the top of its range. Further strength would generate exhaustive patterns, and we would expect the 0.85 pivot to be tested. However, there seems little technically to suggest the NZD/USD would not find significant support below 0.85.

FIGURE 2: NZD/AUD DAILY CANDLES WITH RSI AND MA

NZD/AUD looks fairly valued between 0.91 and 0.95. However, the rejection of the move toward mid-range creates risks to the downside. The key support between 0.9130 and 0.9150 has not yet been thoroughly tested and the technical picture suggests markets will move to test this zone. Should that zone fail it would suggest a retest of the 0.8950-0.90 support zone.

TABLE 5: KEY TECHNICAL ZONES CROSS SUPPORT RESISTANCE

NZD/USD 0.8500 – 0.8520 0.8400 – 0.8430

0.8730 - 0.8750 0.8840 - 0.8850

NZD/AUD 0.9130 – 0.9150 0.8950 – 0.9000

0.9380 – 0.9400

NZD/EUR 0.6140 – 0.6160 0.6340 – 0.6360

NZD/GBP 0.5040 – 0.5060 0.4980 – 0.5000

0.5220 – 0.5240

NZD/JPY 86.30 – 86.80 88.50 – 89.00

POSITIONING

NZD positioning was increased to 20.7k contracts, while AUD longs were reduced by 2.1k to +8.6k. Yen shorts declined, but overall remain large at 60.7k.

GLOBAL VIEWS

All eyes are on the ECB and what they can do to get the euro down and inflation up. The ECB is walking a fine line of verbal intervention and the time for action is rapidly approaching. Should the ECB refrain from delivering substantial policy action in June they would risk increasing the fundamental support for the EUR/USD. What sort of action might take place is under debate, but it simply needs to be aggressive in the form of active intervention or QE for the euro to remain capped. Tactically at least it seems EUR will remain under pressure from the threat of this action, and we would expect the immediate reaction to be EUR negative. However, it is important to consider the second-order impacts of such policies. Should, as ANZ expects, the ECB target Asset Backed Securities, thus shoring up Europe’s banks and credit markets, it could make EUR a more attractive place to invest over the long term. ANZ continues to expect EUR to strengthen into the year end.

FORWARDS: CARRY AND BASIS.

FIGURE 3: NZD/USD SHORT BASIS CURVE

-8-6-4-202468

101214

O/N 2m 4m 6m 8m 10m 12m

Basis

Months

Current

Last week

RBNZ cash settlement size at $7.5bn is at the top end of the $6-8bn range. This led to cash trading softer (15bps below OCR) last week, in turn pulling front-end basis lower as the market looked to exit any long balances.

FIGURE 4: RELATIVE ATTRACTION OF THE FWD CURVE

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

O/N 1m 2m 3m 4m 5m 6m 7m 8m 9m 10m 11m 12m

Months

Current

Last week

Relative value


DATA EVENT CALENDAR

DATE COUNTRY DATA/EVENT MKT. LAST NZ TIME

12-May JN BoP Current Account Balance - Mar -- ¥116.4B(a) 11:50

JN BoP Current Account Adjusted - Mar -- -¥782.9B(a) 11:50

JN Trade Balance BoP Basis - Mar -- -¥1133.6B(a) 11:50

AU NAB Business Confidence - Apr -- 6(a) 13:30

AU NAB Business Conditions - Apr -- 0(a) 13:30

AU Credit Card Balances - Mar -- $A49.8B(a) 13:30

AU Credit Card Purchases - Mar -- $A23.0B(a) 13:30

NZ REINZ House Price Index MoM - Apr -- 3.4% 15:00

NZ REINZ House Sales YoY - Apr -- -10.0% 15:00

CH New Yuan Loans - Apr 800.0B 1050.0B 12-15 May

CH Money Supply M2 YoY - Apr 12.20% 12.10% 12-15 May

13-May US Monthly Budget Statement - Apr $114.0B $112.9B 06:00

NZ ANZ Truckometer Heavy MoM - Apr -- -1.1% 10:00

NZ Food Prices MoM - Apr -- -0.3% 10:45

AU Home Loans MoM - Mar 1.0% 2.3% 13:30

AU Investment Lending - Mar -- 4.4% 13:30

AU Owner-Occupier Loan Value MoM - Mar -- 1.9% 13:30

AU House Price Index QoQ - 1Q 3.0% 3.5% 13:30

AU House Price Index YoY - 1Q 10.4% 9.5% 13:30

CH Fixed Assets Ex Rural YTD YoY - Apr 17.7% 17.6% 17:30

CH Retail Sales YoY - Apr 12.2% 12.2% 17:30

CH Industrial Production YoY - Apr 8.9% 8.8% 17:30

GE Wholesale Price Index MoM - Apr -- 0.0% 18:00

GE ZEW Survey Current Situation - May 60.5 59.5 21:00

GE ZEW Survey Expectations - May 40.0 43.2 21:00

EC ZEW Survey Expectations - May -- 61.2 21:00

US NFIB Small Business Optimism - Apr 94.5 93.4 23:30

US Mortgage Delinquencies - 1Q -- 6.39% 13-17 May

US MBA Mortgage Foreclosures - 1Q -- 2.86% 13-17 May

14-May US Retail Sales Advance MoM - Apr 0.4% 1.2% 00:30

US Retail Sales Ex Auto MoM - Apr 0.6% 0.7% 00:30

US Retail Sales Ex Auto and Gas - Apr 0.5% 1.0% 00:30

US Import Price Index MoM - Apr 0.3% 0.6% 00:30

US Import Price Index YoY - Apr 0.4% -0.6% 00:30

US Business Inventories - Mar 0.4% 0.4% 02:00

NZ RBNZ Financial Stability Report - May -- -- 09:00

NZ Retail Sales Ex Inflation QoQ - 1Q 0.9% 1.2% 10:45

NZ Non Resident Bond Holdings - Apr -- 62.8% 15:00

GE CPI MoM - Apr F -0.2% -0.2% 18:00

GE CPI YoY - Apr F 1.3% 1.3% 18:00

GE CPI EU Harmonized MoM - Apr F -0.3% -0.3% 18:00

GE CPI EU Harmonized YoY - Apr F 1.1% 1.1% 18:00

UK Claimant Count Rate - Apr 3.3% 3.4% 20:30

UK Jobless Claims Change - Apr -30.0K -30.4K 20:30

UK Average Weekly Earnings 3M/YoY - Mar 2.1% 1.7% 20:30

UK Weekly Earnings ex Bonus 3M/YoY - Mar 1.5% 1.4% 20:30

UK ILO Unemployment Rate 3Mths - Mar 6.8% 6.9% 20:30

EC Industrial Production SA MoM - Mar -0.3% 0.2% 21:00

Continued on following page


DATA EVENT CALENDAR

Key: AU: Australia, EC: Eurozone, GE: Germany, JN: Japan, NZ: New Zealand, UK: United Kingdom, US: United States, CH: China. Source: Dow Jones, Reuters, Bloomberg, ANZ Bank New Zealand Limited. All $ values in local currency Note: All surveys are preliminary and subject to change

DATE COUNTRY DATA/EVENT MKT. LAST NZ TIME

14-May EC Industrial Production WDA YoY - Mar 0.9% 1.7% 21:00

UK Bank of England Releases Inflation Report -- -- 21:30

US MBA Mortgage Applications - 9-May -- 5.3% 23:00

CH Foreign Direct Investment YoY - Apr 2.0% -1.5% 14-18 May

15-May US PPI Final Demand MoM - Apr 0.2% 0.5% 00:30

US PPI Ex Food and Energy MoM - Apr 0.2% 0.6% 00:30

US PPI Final Demand YoY - Apr 1.7% 1.4% 00:30

US PPI Ex Food and Energy YoY - Apr 1.4% 1.4% 00:30

NZ BusinessNZ Manufacturing PMI - Apr -- 58.4 10:30

JN GDP SA QoQ - 1Q P 1.0% 0.2% 11:50

JN GDP Annualized SA QoQ - 1Q P 4.2% 0.7% 11:50

JN GDP Nominal SA QoQ - 1Q P 1.0% 0.3% 11:50

JN GDP Deflator YoY - 1Q P -0.1% -0.3% 11:50

AU Consumer Inflation Expectation - May -- 2.4% 13:00

AU New Motor Vehicle Sales MoM - Apr -- -0.3% 13:30

AU New Motor Vehicle Sales YoY - Apr -- -2.8% 13:30

AU RBA FX Transactions Market - Apr -- 736M 13:30

NZ Budget 2014 -- -- 14:00

GE GDP SA QoQ - 1Q P 0.7% 0.4% 18:00

GE GDP WDA YoY - 1Q P 2.2% 1.4% 18:00

GE GDP NSA YoY - 1Q P 2.5% 1.3% 18:00

EC CPI MoM - Apr 0.2% 0.9% 21:00

EC CPI YoY - Apr F 0.7% 0.5% 21:00

EC CPI Core YoY - Apr F 1.0% 1.0% 21:00

EC GDP SA QoQ - 1Q A 0.4% 0.2% 21:00

EC GDP SA YoY - 1Q A 1.1% 0.5% 21:00

16-May US Empire Manufacturing - May 6.00 1.29 00:30

US CPI MoM - Apr 0.3% 0.2% 00:30

US CPI Ex Food and Energy MoM - Apr 0.1% 0.2% 00:30

US CPI YoY - Apr 2.0% 1.5% 00:30

US CPI Ex Food and Energy YoY - Apr 1.7% 1.7% 00:30

US Initial Jobless Claims - 10-May 320K 319K 00:30

US Continuing Claims - 3-May 2750K 2685K 00:30

US Net Long-term TIC Flows - Mar $30.0B $85.7B 01:00

US Total Net TIC Flows - Mar -- $167.7B 01:00

US Industrial Production MoM - Apr 0.0% 0.7% 01:15

US Capacity Utilization - Apr 79.1% 79.2% 01:15

US Manufacturing (SIC) Production - Apr 0.3% 0.5% 01:15

US Philadelphia Fed Business Outlook - May 14.10 16.6 02:00

US NAHB Housing Market Index - May 49 47 02:00

EC Trade Balance SA - Mar -- €15.0B 21:00

EC Trade Balance NSA - Mar €16.0B €13.6B 21:00

17-May US Housing Starts - Apr 981K 946K 00:30

US Housing Starts MoM - Apr 3.7% 2.8% 00:30

US Building Permits - Apr 1014K 997K 00:30

US Building Permits MoM - Apr 1.70% -1.70% 00:30

US Univ. of Michigan Confidence - May P 84.5 84.1 01:55


LOCAL DATA WATCH

Despite a contained inflation print the RBNZ are expected to continue unwinding policy stimulus, with a further 25 basis point hike in the OCR in June, followed by a pause. The speed and magnitude of further hikes remains conditional on local and global developments. We expect a moderate OCR endpoint this cycle with this week’s Budget expected to maintain fiscal discipline. While overall financial stability is sound, the RBNZ will remain vigilant.

DATE DATA/EVENT ECONOMIC SIGNAL COMMENT

Mon 12 May (3:00pm)

REINZ Housing Market data - April

Slowing Small climb in sales volumes likely but well down on a year ago. Annual house price inflation to slow below 9%.

Tue 13 May (10:00am)

ANZ Truckometer – April

- - - -

Tue 13 May (10:45am)

Food Price Index – April

Up Higher grocery prices are expected to deliver a 0.4% increase (+1.4% y/y).

Wed 14 May (9:00am)

RBNZ May FSR On watch Sound financial system but risks from high NZD, benign financial market backdrop. LVR speed limits are working.

Wed 14 May (10:45am)

Retail Trade – Q1 Car boost Vehicle spending to contribute to a 0.9% lift in retail volumes. Moderate elsewhere (+0.5% for core retail).

Thur 15 May (10:30am)

BNZ Business NZ – PMI – April

High 50’s Small fall from 58.4 March reading likely. Still elevated, with construction boost to dominating high NZD impact for now.

Thur 15 May (2:00pm)

2014 Budget On track Maintaining fiscal discipline, on track to deliver small Obegal surplus by 2014/15. More details on a number of initiatives will be announced.

Mon 19 May (10:30am)

BNZ Business NZ – PSI – April

Late 50’s Broadening expansion evident, although sentiment expected to dip from 58.3 March reading.

Tue 20 May (1:00pm)

ANZ Regional Trends – Q1

- - - -

Wed 21 May (10:45am)

International Travel & Migration – April

Coming in A close to 4,000 person net PLT inflow is expected, with annual net PLT set to top 40,000 persons in H2 2014.

Wed 20 May (early am)

GlobalDairyTrade auction

Holding Prices are likely to stabilise around the USD 4,000 / MT level. Upward sloping forward contract prices provide some comfort.

Wed 21 May (3:00pm)

RBNZ Credit Card billings – April

Flat No change in overall billings expected.


RBNZ Survey of Expectations – Q2

Contained The 2-year-ahead CPI forecast is expected to hover around 2.3-2.4%. Growth expectations remain solid.

Thur 22 May (10:00am)

ANZ Job Ads – Apr - - - -


ANZ Roy Morgan Consumer Confidence – May

- - - -

Mon 26 May (10:45am)

April Overseas Merchandise Trade

Peaking A $800m surplus, with the annual surplus widening to $1.5bn. Lower dairy countered by lower imports.

Wed 28 May (1:00pm)

ANZ Business Outlook - May

- - - -

Fri 30 May (10:45am)

April Building Consents

Recoil Falls in apartment issuance to contribute to small fall in residential numbers, but ex-apartment issuance up 1-2%.

Fri 30 May (3:00pm)

RBNZ Credit Aggregates - April

Contained Annual credit growth to remain below nominal GDP. Household credit growth to moderate further.

Tue 2 June (10:45am)

Overseas Trade Indexes – Q1

Peaking? A 1.2% increase in the goods terms of trade are expected, with large negative net export contribution to GDP.

Wed 3 June (10:45am)

Work Put in Place - Q1

Lifting A 6% rise in expected, with both residential and non-residential work up strongly.

On Balance Strengthening Economy strengthening, with a total of 100bps of OCR hikes over 2014.


KEY FORECASTS AND RATES

Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16

GDP (% qoq) 1.0 0.9 0.8 0.8 0.8 0.8 0.7 0.7 0.7 0.6

GDP (% yoy) 3.6 4.1 3.8 3.7 3.5 3.3 3.2 3.0 2.9 2.7

CPI (% qoq) 0.3 0.4 0.7 0.2 0.6 0.6 0.8 0.3 0.7 0.7

CPI (% yoy) 1.5 1.8 1.5 1.7 1.9 2.1 2.2 2.3 2.4 2.5

Employment (% qoq) 0.9 0.5 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3

Employment (% yoy) 3.7 3.8 2.9 2.2 1.6 1.4 1.3 1.2 1.1 1.1

Unemployment Rate (% sa) 6.0 5.7 5.6 5.6 5.5 5.5 5.5 5.5 5.5 5.5

Current Account (% GDP) -3.0 -3.3 -3.3 -4.1 -4.6 -4.8 -5.0 -5.2 -5.3 -5.4

Terms of Trade (% qoq) 1.2 -1.6 -1.5 -1.3 -1.0 -0.9 -0.7 -0.5 -0.5 -0.3

Terms of Trade (% yoy) 16.4 9.4 0.3 -3.3 -5.4 -4.7 -3.9 -3.1 -2.6 -2.0

Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14

Retail ECT (% mom) 0.5 0.6 -1.2 1.9 0.7 0.6 -0.4 0.8 0.0 0.3

Retail ECT (% yoy) 7.7 6.4 3.5 7.0 6.7 5.5 6.1 5.7 5.1 5.7

Credit Card Billings (% mom)

-0.5 0.9 -0.3 -0.5 3.8 -0.6 1.4 0.5 1.1 --

Credit Card Billings (% yoy)

4.6 5.9 3.9 3.2 6.9 5.0 9.2 6.0 7.9 --

Car Registrations (% mom)

10.4 -4.5 -7.7 7.2 2.7 -1.2 2.6 4.1 3.2 -0.5

Car Registrations (% yoy)

27.6 23.0 15.8 16.2 23.0 20.3 20.2 23.6 26.8 17.5

Building Consents (% mom)

-3.2 1.9 2.0 0.6 11.9 6.7 -8.5 -1.6 8.3 --

Building Consents (% yoy)

22.7 20.4 15.1 17.5 41.1 38.6 23.9 15.4 37.0 --

REINZ House Price Index (% yoy)

8.6 9.5 9.8 9.9 9.6 9.2 7.7 8.2 9.2 --

Household Lending Growth (% mom)

0.4 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4 --

Household Lending Growth (% yoy)

5.2 5.4 5.6 5.7 5.6 5.7 5.7 5.7 5.6 --

ANZ Roy Morgan Consumer Conf.

119.8 123.0 118.8 122.3 128.4 129.4 135.8 133.0 132.0 133.5

ANZ Business Confidence

52.8 48.1 54.1 53.2 60.5 64.1 .. 70.8 67.3 67.3

ANZ Own Activity Outlook

43.7 43.3 45.3 47.1 47.1 53.5 .. 58.5 58.2 58.2

Trade Balance ($m) -788 -1236 -221 -169 153 492 280 793 920 --

Trade Bal ($m ann) -1705 -2129 -1559 -1014 -274 -317 257 617 805 --

ANZ World Commodity Price Index (% mom)

0.7 0.7 1.1 1.3 -0.3 1.0 1.2 0.9 -0.1 -4.0

ANZ World Comm Price Index (% yoy)

25.5 25.7 22.9 22.8 21.3 21.5 22.6 22.4 14.0 -2.8

Net Migration (sa) 1990 2170 2760 2980 2750 2940 3150 3540 3840 --

Net Migration (ann) 10569 12848 15174 17490 19478 22468 25666 29022 31914 --

ANZ Heavy Traffic Index (% mom)

10.2 -1.7 -0.1 0.4 -1.9 2.2 0.0 2.4 -1.1 --

ANZ Light Traffic Index (% mom)

0.8 -0.2 -0.6 -0.6 -0.6 -0.6 -0.6 -0.4 1.1 --

Figures in bold are forecasts. mom: Month-on-Month qoq: Quarter-on-Quarter yoy: Year-on-Year


KEY FORECASTS AND RATES

ACTUAL FORECAST (END MONTH)

FX RATES Mar-14 Apr-14 Today Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

NZD/USD 0.866 0.862 0.863 0.83 0.83 0.81 0.79 0.78 0.77 0.76

NZD/AUD 0.935 0.928 0.922 0.94 0.95 0.95 0.94 0.93 0.92 0.90

NZD/EUR 0.629 0.621 0.627 0.60 0.59 0.57 0.56 0.55 0.53 0.51

NZD/JPY 89.43 88.10 87.98 87.2 88.8 89.1 86.9 85.8 84.7 83.6

NZD/GBP 0.520 0.511 0.512 0.49 0.48 0.47 0.45 0.45 0.44 0.43

NZ$ TWI 80.6 79.8 80.1 78.0 78.1 76.6 74.8 73.7 72.5 71.1

INTEREST RATES Mar-14 Apr-14 Today Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15

NZ OCR 2.75 3.00 3.00 3.25 3.25 3.50 3.75 3.75 4.00 4.25

NZ 90 day bill 3.12 3.33 3.41 3.50 3.50 3.90 4.00 4.00 4.40 4.50

NZ 10-yr bond 4.59 4.41 4.27 4.50 4.70 4.80 5.00 5.20 5.30 5.40

US Fed funds 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50 0.75 1.00

US 3-mth 0.23 0.22 0.22 0.30 0.40 0.50 0.60 0.80 1.10 1.40

AU Cash Rate 2.50 2.50 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50

AU 3-mth 2.70 2.68 2.69 2.70 2.70 2.70 2.90 3.20 3.40 3.70

Forecasts finalised as at March 28, 2014

9 Apr 5 May 6 May 7 May 8 May 9 May

Official Cash Rate 2.75 3.00 3.00 3.00 3.00 3.00

90 day bank bill 3.20 3.32 3.32 3.31 3.34 3.34

NZGB 12/17 4.13 3.94 3.95 3.91 3.89 3.89

NZGB 03/19 4.25 4.06 4.07 4.03 4.01 4.01

NZGB 05/21 4.45 4.22 4.23 4.18 4.15 4.15

NZGB 04/23 4.57 4.35 4.36 4.31 4.28 4.28

2 year swap 4.06 3.99 4.01 3.95 3.94 3.94

5 year swap 4.63 4.49 4.50 4.44 4.41 4.41

RBNZ TWI 80.8 80.4 80.8 80.5 80.2 80.2

NZD/USD 0.8701 0.8656 0.8698 0.8696 0.8662 0.8662

NZD/AUD 0.9285 0.9345 0.9368 0.9310 0.9247 0.9247

NZD/JPY 88.73 88.24 88.75 88.36 88.21 88.21

NZD/GBP 0.5196 0.5130 0.5151 0.5122 0.5110 0.5110

NZD/EUR 0.6309 0.6238 0.6266 0.6244 0.6225 0.6225

AUD/USD 0.9371 0.9263 0.9285 0.9340 0.9367 0.9367

EUR/USD 1.3792 1.3876 1.3882 1.3926 1.3915 1.3915

USD/JPY 101.98 101.94 102.04 101.61 101.83 101.83

GBP/USD 1.6747 1.6874 1.6887 1.6978 1.6952 1.6952

Oil (US$/bbl) 102.57 100.09 99.74 99.81 101.06 101.06

Gold (US$/oz) 1312.05 1306.40 1309.08 1312.00 1290.28 1290.28

Electricity (Haywards) 10.56 7.88 5.56 4.48 4.89 6.09

Baltic Dry Freight Index 1061 -- 1022 1022 1008 997

Milk futures (USD) 184 179 178 177 179 178


IMPORTANT NOTICE

The distribution of this document or streaming of this video broadcast (as applicable, “publication”) may be restricted by law in certain jurisdictions. Persons who receive this publication must inform themselves about and observe all relevant restrictions. 1. Disclaimer for all jurisdictions, where content is authored by ANZ Research: Except if otherwise specified in section 2 below, this publication is issued and distributed in your country/region by Australia and New Zealand Banking Group Limited (ABN 11 005 357 522) (“ANZ”), on the basis that it is only for the information of the specified recipient or permitted user of the relevant website (collectively, “recipient”). This publication may not be reproduced, distributed or published by any recipient for any purpose. It is general information and has been prepared without taking into account the objectives, financial situation or needs of any person. Nothing in this publication is intended to be an offer to sell, or a solicitation of an offer to buy, any product, instrument or investment, to effect any transaction or to conclude any legal act of any kind. If, despite the foregoing, any services or products referred to in this publication are deemed to be offered in the jurisdiction in which this publication is received or accessed, no such service or product is intended for nor available to persons resident in that jurisdiction if it would be contradictory to local law or regulation. Such local laws, regulations and other limitations always apply with non-exclusive jurisdiction of local courts. Before making an investment decision, recipients should seek independent financial, legal, tax and other relevant advice having regard to their particular circumstances. The views and recommendations expressed in this publication are the author’s. They are based on information known by the author and on sources which the author believes to be reliable, but may involve material elements of subjective judgement and analysis. Unless specifically stated otherwise: they are current on the date of this publication and are subject to change without notice; and, all price information is indicative only. Any of the views and recommendations which comprise estimates, forecasts or other projections, are subject to significant uncertainties and contingencies that cannot reasonably be anticipated. On this basis, such views and recommendations may not always be achieved or prove to be correct. Indications of past performance in this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Additionally, this publication may contain ‘forward looking statements’. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward looking statements. All investments entail a risk and may result in both profits and losses. Foreign currency rates of exchange may adversely affect the value, price or income of any products or services described in this publication. The products and services described in this publication are not suitable for all investors, and transacting in these products or services may be considered risky. ANZ and its related bodies corporate and affiliates, and the officers, employees, contractors and agents of each of them (including the author) (“Affiliates”), do not make any representation as to the accuracy, completeness or currency of the views or recommendations expressed in this publication. Neither ANZ nor its Affiliates accept any responsibility to inform you of any matter that subsequently comes to their notice, which may affect the accuracy, completeness or currency of the information in this publication. Except as required by law, and only to the extent so required: neither ANZ nor its Affiliates warrant or guarantee the performance of any of the products or services described in this publication or any return on any associated investment; and, ANZ and its Affiliates expressly disclaim any responsibility and shall not be liable for any loss, damage, claim, liability, proceedings, cost or expense (“Liability”) arising directly or indirectly and whether in tort (including negligence), contract, equity or otherwise out of or in connection with this publication. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. ANZ and its Affiliates do not accept any Liability as a result of electronic transmission of this publication. ANZ and its Affiliates may have an interest in the subject matter of this publication as follows: They may receive fees from customers for dealing in the products or services described in this publication, and their staff and

introducers of business may share in such fees or receive a bonus that may be influenced by total sales. They or their customers may have or have had interests or long or short positions in the products or services described in this

publication, and may at any time make purchases and/or sales in them as principal or agent. They may act or have acted as market-maker in products described in this publication. ANZ and its Affiliates may rely on information barriers and other arrangements to control the flow of information contained in one or more business areas within ANZ or within its Affiliates into other business areas of ANZ or of its Affiliates. Please contact your ANZ point of contact with any questions about this publication including for further information on these disclosures of interest. 2. Country/region specific information: Australia. This publication is distributed in Australia by ANZ. ANZ holds an Australian Financial Services licence no. 234527. A copy of ANZ's Financial Services Guide is available at http://www.anz.com/documents/AU/aboutANZ/FinancialServicesGuide.pdf and is available upon request from your ANZ point of contact. If trading strategies or recommendations are included in this publication, they are solely for the information of ‘wholesale clients’ (as defined in section 761G of the Corporations Act 2001 Cth). Persons who receive this publication must inform themselves about and observe all relevant restrictions. Brazil. This publication is distributed in Brazil by ANZ on a cross border basis and only following request by the recipient. No securities are being offered or sold in Brazil under this publication, and no securities have been and will not be registered with the Securities Commission – CVM. Brunei. Japan. Kuwait. Malaysia. Switzerland. Taiwan. This publication is distributed in each of Brunei, Japan, Kuwait, Malaysia, Switzerland and Taiwan by ANZ on a cross-border basis. European Economic Area (“EEA”): United Kingdom. ANZ in the United Kingdom is authorised by the Prudential Regulation Authority (“PRA”). Subject to regulation by the Financial Conduct Authority (“FCA”) and limited regulation by the PRA. Details about the extent of our regulation by the PRA are available from us on request. This publication is distributed in the United Kingdom by ANZ solely for the information of persons who would come within the FCA definition of “eligible counterparty” or “professional client”. It is not intended for and must not be distributed to any person who would come within the FCA definition of “retail client”. Nothing here excludes or restricts any duty or liability to a customer which ANZ may have under the UK Financial Services and Markets Act 2000 or under the regulatory system as defined in the Rules of the PRA and the FCA. Germany. This publication is distributed in Germany by the Frankfurt Branch of ANZ solely for the information of its clients. Other EEA countries. This publication is distributed in the EEA by ANZ Bank (Europe) Limited (“ANZBEL”) which is authorised by the PRA and regulated by the FCA and the PRA in the United Kingdom, to persons who would come within the FCA definition of “eligible counterparty” or “professional client” in other countries in the EEA. This publication is distributed in those countries solely for the information of such persons upon their request. It is not intended for, and must not be distributed to, any person in those countries who would come within the FCA definition of “retail client”. Fiji. For Fiji regulatory purposes, this publication and any views and recommendations are not to be deemed as investment advice. Fiji investors must seek licensed professional advice should they wish to make any investment in relation to this publication. Hong Kong. This publication is distributed in Hong Kong by the Hong Kong branch of ANZ, which is registered at the Hong Kong Monetary Authority to conduct Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities. The contents of this publication have not been reviewed by any regulatory authority in Hong Kong. If in doubt about the contents of this publication, you should obtain independent professional advice.


IMPORTANT NOTICE

India. This publication is distributed in India by ANZ on a cross-border basis. If this publication is received in India, only you (the specified recipient) may print it provided that before doing so, you specify on it your name and place of printing. Further copying or duplication of this publication is strictly prohibited. New Zealand. This publication is distributed in New Zealand by ANZ Bank New Zealand Limited. This publication is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised adviser service under the Financial Advisers Act 2008. Oman. This publication has been prepared by ANZ. ANZ neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently ANZ is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. The information contained in this publication is for discussion purposes only and neither constitutes an offer of securities in Oman as contemplated by the Commercial Companies Law of Oman (Royal Decree 4/74) or the Capital Market Law of Oman (Royal Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy non-Omani securities in Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market Law (issued vide CMA Decision 1/2009). ANZ does not solicit business in Oman and the only circumstances in which ANZ sends information or material describing financial products or financial services to recipients in Oman, is where such information or material has been requested from ANZ and by receiving this publication, the person or entity to whom it has been dispatched by ANZ understands, acknowledges and agrees that this publication has not been approved by the CBO, the CMA or any other regulatory body or authority in Oman. ANZ does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. Nothing contained in this publication is intended to constitute Omani investment, legal, tax, accounting or other professional advice. People’s Republic of China. If and when the material accompanying this publication does not only relate to the products and/or services of Australia and New Zealand Bank (China) Company Limited (“ANZ China”), it is noted that: This publication is distributed by ANZ or an affiliate. No action has been taken by ANZ or any affiliate which would permit a public offering of any products or services of such an entity or distribution or re-distribution of this publication in the People’s Republic of China (“PRC”). Accordingly, the products and services of such entities are not being offered or sold within the PRC by means of this publication or any other method. This publication may not be distributed, re-distributed or published in the PRC, except under circumstances that will result in compliance with any applicable laws and regulations. If and when the material accompanying this publication relates to the products and/or services of ANZ China only, it is noted that: This publication is distributed by ANZ China in the Mainland of the PRC. Qatar. This publication has not been, and will not be lodged or registered with, or reviewed or approved by, the Qatar Central Bank ("QCB"), the Qatar Financial Centre ("QFC") Authority, QFC Regulatory Authority or any other authority in the State of Qatar ("Qatar"); or authorised or licensed for distribution in Qatar; and the information contained in this publication does not, and is not intended to, constitute a public offer or other invitation in respect of securities in Qatar or the QFC. The financial products or services described in this publication have not been, and will not be registered with the QCB, QFC Authority, QFC Regulatory Authority or any other governmental authority in Qatar; or authorised or licensed for offering, marketing, issue or sale, directly or indirectly, in Qatar. Accordingly, the financial products or services described in this publication are not being, and will not be, offered, issued or sold in Qatar, and this publication is not being, and will not be, distributed in Qatar. The offering, marketing, issue and sale of the financial products or services described in this publication and distribution of this publication is being made in, and is subject to the laws, regulations and rules of, jurisdictions outside of Qatar and the QFC. Recipients of this publication must abide by this restriction and not distribute this publication in breach of this restriction. This publication is being sent/issued to a limited number of institutional and/or sophisticated investors (i) upon their request and confirmation that they understand the statements above; and (ii) on the condition that it will not be provided to any person other than the original recipient, and is not for general circulation and may not be reproduced or used for any other purpose. Singapore. This publication is distributed in Singapore by the Singapore branch of ANZ solely for the information of “accredited investors”, “expert investors” or (as the case may be) “institutional investors” (each term as defined in the Securities and Futures Act Cap. 289 of Singapore). ANZ is licensed in Singapore under the Banking Act Cap. 19 of Singapore and is exempted from holding a financial adviser’s licence under Section 23(1)(a) of the Financial Advisers Act Cap. 100 of Singapore. In respect of any matters arising from, or in connection with the distribution of this publication in Singapore, contact your ANZ point of contact. United Arab Emirates. This publication is distributed in the United Arab Emirates (“UAE”) or the Dubai International Financial Centre (as applicable) by ANZ. This publication: does not, and is not intended to constitute an offer of securities anywhere in the UAE; does not constitute, and is not intended to constitute the carrying on or engagement in banking, financial and/or investment consultation business in the UAE under the rules and regulations made by the Central Bank of the United Arab Emirates, the Emirates Securities and Commodities Authority or the United Arab Emirates Ministry of Economy; does not, and is not intended to constitute an offer of securities within the meaning of the Dubai International Financial Centre Markets Law No. 12 of 2004; and, does not constitute, and is not intended to constitute, a financial promotion, as defined under the Dubai International Financial Centre Regulatory Law No. 1 of 200. ANZ DIFC Branch is regulated by the Dubai Financial Services Authority (“DFSA”). The financial products or services described in this publication are only available to persons who qualify as “Professional Clients” or “Market Counterparty” in accordance with the provisions of the DFSA rules. In addition, ANZ has a representative office (“ANZ Representative Office”) in Abu Dhabi regulated by the Central Bank of the United Arab Emirates. ANZ Representative Office is not permitted by the Central Bank of the United Arab Emirates to provide any banking services to clients in the UAE. United States. If and when this publication is received by any person in the United States or a "U.S. person" (as defined in Regulation S under the US Securities Act of 1933, as amended) (“US Person”) or any person acting for the account or benefit of a US Person, it is noted that ANZ Securities, Inc. (“ANZ S”) is a member of FINRA (www.finra.org) and registered with the SEC. ANZ S’ address is 277 Park Avenue, 31st Floor, New York, NY 10172, USA (Tel: +1 212 801 9160 Fax: +1 212 801 9163). Except where this is a FX- related or commodity-related publication, this publication is distributed in the United States by ANZ S (a wholly owned subsidiary of ANZ), which accepts responsibility for its content. Information on any securities referred to in this publication may be obtained from ANZ S upon request. Any US Person receiving this publication and wishing to effect transactions in any securities referred to in this publication must contact ANZ S, not its affiliates. Where this is an FX- related or commodity-related publication, it is distributed in the United States by ANZ's New York Branch, which is also located at 277 Park Avenue, 31st Floor, New York, NY 10172, USA (Tel: +1 212 801 9160 Fax: +1 212 801 9163). Commodity-related products are not insured by any U.S. governmental agency, and are not guaranteed by ANZ or any of its affiliates. Transacting in these products may involve substantial risks and could result in a significant loss. You should carefully consider whether transacting in commodity-related products is suitable for you in light of your financial condition and investment objectives. ANZ S is authorised as a broker-dealer only for US Persons who are institutions, not for US Persons who are individuals. If you have registered to use this website or have otherwise received this publication and are a US Person who is an individual: to avoid loss, you should cease to use this website by unsubscribing or should notify the sender and you should not act on the contents of this publication in any way.

This document has been prepared by ANZ Bank New Zealand Limited, Level 7, 1 Victoria Street, Wellington 6011, New Zealand, Ph 64-4-802 2199, Fax 64-4-496 8639, e-mail [email protected], http://www.anz.co.nz

new zealand economics market focus · pdf file · 2014-10-03new zealand economics...

Documents