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7 May 2018
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Markets Outlook RESEARCH
Either Or
Any changes in MPS likely style not substance
As we tune in to all that Governor Orr has to say
And a slightly firmer CPI inflation outlook?
Inflation expectations, ECT, PMI and FPI due
Finance Minister Robertson speaking on Thursday
We are not anticipating any material changes in
Thursday’s Monetary Policy Statement (MPS). If there are
any, they are likely to be more of style than substance,
given the new Governor and Policy Targets Agreement
(PTA). Nonetheless, this could cause markets to read
more into any nuances, and change of language, than is
warranted.
This may or may not be aggravated by what the new
Governor, Adrian Orr, says. In this regard, we note that as
well as the MPS introductory text, there is the press
conference due to commence 10:00am, as well as RBNZ
testimony to parliament’s Finance and Expenditure
Committee from about 1:10pm. These will be prime
opportunities to get a flavour of the new governor.
But, as we noted in our MPS preview;
“Those looking for a radical shift in stance, thanks to the
installation of a new Governor and Policy Targets
Agreement (PTA), will likely be disappointed. Yes, there
will be subtle nuances and, it goes without saying that
Adrian Orr’s presentation style in the post MPS news
conference will be more dynamic than his predecessor.
But a change in direction? No!
There may, nonetheless, be some subtle changes in the
content of the MPS in order to meet the requirements of
the new PTA. In particular, the RBNZ is now tasked with
explaining “how current monetary policy decisions
contribute to supporting maximum levels of sustainable
employment within the economy”. This doesn’t
necessarily mean that the Bank will change what it does
but it might feel the need to more thoroughly explain what
it’s doing and why with deference to the labour market.”
Might this even mean an extra column, for, say, the
unemployment rate, in the Bank’s “key forecast variables”
table?
From looking at this table in February’s MPS, nothing
jumps out at us as way off beam, in need of a major re-
cast. There is potential for the Bank to tone down its GDP
growth expectations for H1 2018, but only a sliver. But
then the trade-weighted exchange rate (TWI), in easing
Upside
ahead of schedule, is running a few per cent below RBNZ
assumptions.
This, along with higher commodity prices (notably for oil),
is likely to put upward pressure on the Bank’s headline CPI
inflation forecasts. Recall that the February MPS expected
annual CPI inflation to pick up to 1.8% this year and
persist at this rate in 2019. For reference, we anticipate
2.2% and 2.0% respectively. To the extent the Bank does
firm up its inflation forecasts it will underpin the OCR
outlook it already has.
Also arguing against any dovish tilt by the RBNZ this
Thursday is, ironically, the now-explicit mandate in the
new PTA regarding maximising employment. As we noted
in our MPS preview:
“When the employment dual mandate was initially being
discussed many thought that this would result in a
moredovish central bank. At the time we dissented with
this view and we maintain our belief that, at the very
margin, it is likely to bend the RBNZ more towards the
hawkish end of the spectrum. By almost any measure
available one can conclude that the economy is already
very close to its maximum level of sustainable
employment.”
At the very least one would have to conclude that the
RBNZ could not contemplate cutting interest rates while
the labour market is so tight. Whether the Bank is willing
to say this publicly or not is moot.
As for market pricing it is, still, for a firmer, and sooner,
increase in the cash rate than the RBNZ indicated in its
most recent MPS. But there’s not a lot in it and neither
view is what you’d call strong or pre-emptive.
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Annual % change Consumers Price Index
RBNZFebruary
MPS
BNZ
Source: RBNZ, Statistics NZ, BNZ
Target low
Quarterly
Target peak
Forecasts
Target mid-point
Markets Outlook 7 May 2018
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Not Much In It
We formally have February in our forecast track for the
first OCR hike but, realistically, we are equivocating
between February and May. On this basis, and, given
what we think the RBNZ will say on Thursday, we believe
minimal market reaction will be the order of the day. We
believe the Bank will be pitching for little market reaction.
But as for whether this is the result, on the day, will
depend on how the latest RBNZ-speak is interpreted.
The economic data for the coming week begins with
tomorrow’s Crown Financial Accounts. For the nine
months to March 2018, these will be the final monthly
update before the Budget. While recent outcomes have
been better than December’s Half-year update forecast,
we note the degree of out-performance has been
dissipating month to month.
Tuesday afternoon delivers the RBNZ Survey of
Expectations. Its key 2-year-ahead CPI inflation
expectation variable held up rather well last quarter, at
2.11%. There seems a good chance it will persist around
this middling level, as respondents look even further past
the dip that annual CPI inflation is currently going through.
Steady
For Wednesday’s electronic card transactions we
anticipate a pause, after March’s beefy 0.7%. Only a big
fall in April would rattle our view that retail spending
volumes are still expanding robustly.
March quarter ready-mixed concrete production figures
are due for publication Wednesday morning as well.
These will provide their usual early insight into
construction activity. This will be all the more important
considering the mixed messages we’re starting to get
from the industry (albeit with last week’s building
consents going a long way to settling our nerves, for the
meantime at least).
Friday’s economic data begin with April’s Performance of
Manufacturing Index. As well as checking its overall level
we’ll be delving into its food processing component, in
light of various forces bearing on this sector of late, and
which may yet be important for GDP growth over the first
half of 2018.
As for Friday’s Food Price Index, we presume it fell 0.3%
for April, as part of the 0.5% increase we expect of the Q2
CPI (for 1.6% y/y).
Also note that Finance Minister, Grant Robertson will be
speaking midday Thursday, to the Wellington Chamber of
Commerce. This will no doubt outline themes and
expectations for the 17 May Budget, with the business
sector in mind.
Next Please
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2010 2012 2014 2016 2018 2020
NZ OCR
Source: BNZ, Bloomberg
RBNZ Proj.
Market pricing
Quarterly averages
1.0
1.5
2.0
2.5
3.0
3.5
4.0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
%
Quarterly
RBNZ Inflation Expectations
Expected CPI inflation(1 year ahead)
Expected CPI inflation(2 years ahead)
Source: RBNZ, BNZ
Explicit mid-point of RBNZ CPI inflation target
34
36
38
40
42
44
46
48
50
52
54
56
58
60
62
64
66
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Diffusion Index (s.a.)
Monthly
Performance Of Manufacturing Index
Source: BNZ/BusinessNZ
Breakeven
Degree of expansion
Degree of contraction
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Global Watch
Fed chair Powell speaks Tuesday, ahead of
Thursday’s US CPI
No change expected from BoE Thursday
China trade, PPI, and CPI to monitor
Tomorrow’s Aussie Budget to show better position
AU retail sales and NAB survey main data
Australia
It’s fiscal policy in the limelight this week, with the
Government handing down the Federal Budget at
7.30pm (AEST), Tuesday 8 May.
The Budget’s position has improved markedly since last
year’s Budget, and December’s MYEFO. A stronger
economy, higher commodity prices and record
employment growth have delivered a $9 - 10 billion
improvement in the Budget (in annual running terms)
since MYEFO.
While our analysis indicates favourable base-year effects
from an improving economy could conceivably have seen
a return to surplus as early as 2019-20, Treasurer Scott
Morrison has stated the Budget will return to surplus in
2020-21, as previously planned. Rather than bringing
forward the return to surplus, the improvement in the
Budget’s bottom line has given the Government room
for income tax cuts and to further increase infrastructure
spending, a choice that has received some criticism.
The political reality is that this is an election Budget, with
the next Federal election due before 18 May in 2019.
Nevertheless, income tax cuts aimed at low and middle
income earners and infrastructure spending are also likely
to have positive impacts on the economy.
For the markets, it will also be interesting to note
Treasury’s forecasts for GDP. The RBA’s May Statement
of Monetary Policy foreshadows growth of a little over 3%
this year and next year, numbers likely to be included in
the Budget figuring. The Treasurer suggests commodity
price assumptions – and forecasts more generally – will
remain conservative, so that any surprises are favourable.
It will be interesting to see if out-year forecasts are again
trimmed as was the case last year (it’s likely as, for wages
to date, wages growth remains stuck around 2%, despite
the first glimmers of some lift).
Note, in recent years, the bond market hasn’t reacted
noticeably to the release of the Budget and we see a
similar outcome this year. NAB’s expectation for an
improvement in the deficit profile should flow through
to a lower outlook for debt and issuance.
In economic data, the week ahead also contains the April
NAB Business Survey on Monday, Retail Sales on Tuesday
and home loans on Friday. Of these, the NAB survey and
retail sales are the highlights.
Treasury Forecasts Likely To Be Similar To RBA’s
As always, markets will be looking to the NAB survey to
see how the headline business conditions measure is
faring. [Note there are no hints here!] The last few months
have been relatively volatile at high levels – markets will
be looking to see if the historically high level of conditions
is maintained.
We will also be watching capacity utilisation and prices
measures. Cap. use is a leading indicator of labour market
tightening and in recent times has pointed to future
reductions in unemployment. Despite this, price measures
in the NAB survey have remained subdued – we will be
watching out for any pick up.
Cap. Use Suggests Unemployment Should Fall
As a leading indicator for household consumption, retail
sales data for March will be important for markets, and
feed into expectations for Q1 GDP. In particular, recent
comments in the RBA’s Statement of Monetary Policy
indicate “more momentum in household consumption”
than initially estimated has contributed to the Bank’s
confidence that GDP growth will rebound in Q1.
NAB’s estimate for March retail sales is based on internal
data, compiled to create the NAB Cashless Retail Sales
Index. The Index points to a 0.2% m/m increase in retail
sales, which, coupled with modest expected growth in
retail prices, suggests a 0.6% q/q increase in retail sales
Markets Outlook 7 May 2018
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Page 4
volumes in the March quarter. We expect services
consumption volumes to be stronger for Q1, and hence
our preliminary Q1 GDP forecast is for a strong 0.8 to
0.9% q/q.
Retail Sales Expanding
Lastly, home loans data published on Friday is expected
to show the number of owner-occupied loans to be
unchanged in March. In contrast, NAB expects a decline
of 1.2% m/m.
Surplus Forecast To Remain A Few Years Away
Business Sentiment Is Above Average
US
The Fed’s Evans speaks on Monday night/early Tuesday
morning. But Fed Chair Powell’s speech in Zurich on
Tuesday (5.15pm AEST) will be the focus, with markets
seeking to understand what the Fed’s tolerance is for
inflation rising above its target, as seems increasingly
likely. The Fed has taken pains to remind markets that the
2% inflation objective “is symmetric over the medium-
term” and markets are looking for further clarification on
exactly what this means.
On data, the April CPI will be released on Thursday, with
markets expecting the headline measure to strengthen to
0.3% m/m, and the ex- food and energy measure to print
another 0.2% m/m. Markets will be looking for a hint on
PCE, the Fed’s preferred measure of inflation, which is
released at the end of the month.
UK
The BoE meeting on Thursday is also unlikely to result in a
change in policy rate; particularly after Q1 GDP surprised
to the downside. BoE communication post-meeting will
be interesting to watch; what does the BoE make of this
surprise softness – is it a temporary weather-related blip,
or something more sinister?
China
The focus for Chinese data this week will be on the Trade
Balance on Tuesday, followed by PPI and CPI data on
Thursday. On the Trade Balance, markets are expecting to
see a rebound in April, following last month’s potentially
CNY-related softness. On the price measures, the PPI is
expected to print at 3.4% y/y, suggesting PPI growth is
stabilizing; while the CPI is expected to print at 1.9% y/y,
suggesting further softening in price growth.
Canada
Jobs data on Friday will be a focus for markets. While
unemployment is expected to stay unchanged, markets
will be keenly paying attention to hourly earnings, and
whether the lift in earnings growth over the past year is
sustained. .
Eurozone
Quiet week, no material data scheduled.
Japan
It’s a quiet week for Japan, with only Thursday’s March
current account balance of interest.
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Fixed Interest Market
There was little change in both global government bond
yields and NZ swap rates last week. A busy week lies
ahead though, with the RBNZ meeting Thursday (the first
under new Governor Adrian Orr), Fed Chair Powell
speaking on Tuesday, and US core CPI released on Friday.
The 10 year US Treasury yield oscillated between 2.91%
and 2.99% last week, closing at 2.95%. The payrolls
report didn’t move the needle in terms of the market’s
outlook for monetary policy. We see the front-end of the
US curve as fairly priced, with the market pricing a further
2.2 hikes for this year and an additional 1½ hikes in 2019,
taking the Fed funds rate to around 2.75% (vs. the Fed’s
longer run estimate of ‘neutral’ of 2.9% - see chart).
Given the market now prices the Fed funds rate to rise to
near “neutral” by the end of next year, what could cause
Treasury yields to go much higher? First, a rise in term
premium (possibly due to the Fed’s balance sheet
reduction and additional Treasury supply) would put
upward pressure on US Treasury yields irrespective of the
likely path of Fed policy. Second, higher than expected
US inflation would almost certainly lead to higher US
yields. If the Fed responds to higher inflation by
tightening faster, US yields will go higher and the curve
will likely flatten. If the Fed looks through the increase in
inflation, the rise in US yields will likely be led by the long-
end and the curve should steepen.
On Thursday night NZT, US core CPI is released, with the
market expecting the annual rate will tick up to 2.2%. An
increase in core inflation in the coming months (as weak
months from last year roll off the annual calculation) has
been well flagged and Fed officials have been out in force
recently signalling that they don’t intend to respond to a
modest inflation overshoot. Fed Chair Powell’s speech on
Tuesday will be interesting in this regard, to see whether
he reiterates the same point. Our sense is that US core
PCE inflation will need to get close to 2.5% or higher to
generate a material change in the Fed’s tightening plans
and significantly higher US Treasury yields.
Locally, the focus is the RBNZ meeting on Thursday
morning. We don’t anticipate much change from the last
MPS in February, but we judge the incremental news-flow
since then has been, if anything, on the more hawkish
side. Governor Orr’s comments in the press conference
and parliamentary select committee hearing will be
closely scrutinised for any hint as to his leanings on
monetary policy. With the market fully pricing in the first
hike by August 2019 and the next hike priced for March
2020, we think the risks are now tilted to higher NZ rates.
The other key near-term focus for the domestic market is
the Budget on May 17th. In relation to the NZGB market,
we see the bond programme being either unchanged
(why would FM Robertson choose to save any
Reuters: BNZL, BNZM Bloomberg:BNZ
unexpected increase in revenue?) or, if anything, higher.
Interestingly, long-dated NZGBs have performed relatively
strongly over the past month, with longer-dated swap
spreads widening quite sharply (the NZGB 2037 swap-
spread has widened 15bps). At these levels, we think
swap spreads are vulnerable to a correction in the event
the bond programme does get revised higher.
The market is close to pricing the Fed’s long-run ‘dot’
Longer-dated NZGB-swap spreads have widened sharply
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18
Source: Federal Reserve, Bloomberg
Longer-run Fed expectations (US OIS 5y5y forward)
Fed long-run 'dot'
Fed longer-run estimate of neutral vs. 5y5y US OIS%
0
10
20
30
40
50
60
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18
NZGB swap spreads
5 year
2 year
15 year
10 year
bps
Source: BNZ
Current Rates/Spreads and Recent Ranges
Current Last 3 -weeks range*
NZ 90d bank bills (%) 2.04 2.02 - 2.06
NZ 2yr swap (%) 2.28 2.25 - 2.35
NZ 5yr swap (%) 2.74 2.71 - 2.81
NZ 10yr swap (%) 3.22 2.18 - 3.31
2s10s swap curve (bps) 94 85 - 100
NZ 10yr swap-govt (bps) 43 34 - 43
NZ 10yr govt (%) 2.78 2.78 - 2.93
US 10yr govt (%) 2.95 2.81 - 3.03
NZ-US 10yr (bps) -17 -17 - 0
NZ-AU 2yr swap (bps) 14 10 - 16
NZ-AU 10yr govt (bps) 2 0 - 7
*Indicative range over last 3 weeks
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Foreign Exchange Markets
Reuters pg BNZWFWDS Bloomberg pg BNZ9
The theme of a broadly-based USD recovery remained
in play last week. This saw the NZD fall for a third
consecutive week, albeit down by just under 1%, a
reduced rate of change from the previous two weeks.
In last week’s episode, EUR and GBP fared even worse
so the NZD managed some modest gains on those two
crosses.
We think that a positioning shake-out has exaggerated
recent moves. Three weeks ago, CFTC data showed the
longest net positioning in EUR, GBP and NZD and these
currencies have underperformed relative to JPY, CAD, and
AUD, where positioning was closer to neutral. Positioning
is no longer at extreme levels, but if sentiment for the
USD improves further, then NZD, EUR and GBP remain
the most vulnerable of the majors.
After a nearly-5% fall in the NZD over the past few weeks,
we’re reluctant to get bearish at the current level. Our
short-term fair value model has been stuck in a USD 0.70-
0.72 range for the past 12 weeks, largely reflecting the
ebb and flow of risk appetite and NZ commodity prices.
Our narrative then, is that the NZD had been trading a little
rich until a few weeks ago and now the spot rate is
towards the bottom end of the recent fair value range.
Obviously, further upside for the USD would see a more
sustained move below the 0.70 mark but strong technical
support is in a range of 0.68-0.69 and we think that level
would be a tough one to crack. Our current central view is
that the NZD might settle into a lower range of 0.70-0.72
over the next month or two, with only brief skirmishes
outside the range.
In the week ahead, the local focus will be Thursday’s
Monetary Policy Statement, the first one delivered by new
Governor Orr and as such will command much more
interest than usual. While annual CPI inflation dipped to
1.1% y/y in the March quarter, the recent lift in oil prices
and weaker NZD are likely to see headline inflation return
to the 2% mid-point earlier than the Bank previously
projected.
We see the Bank remaining comfortable with its previous
projections for a steady OCR through to late 2019 and as
such the message should remain that “monetary policy
will remain accommodative for a considerable period”.
On the NZD, we see Orr taking a leaf out of the previous
acting Governor Spencer’s playbook, avoiding value
judgements when the NZD is trading well within (wide)
estimates of long-run fair value.
Our view remains that NZ monetary policy won’t be
providing any support to the NZD over the foreseeable
future. Indeed, the NZD lost its high-yield status some
time ago and as the Fed Funds rate rises alongside a flat
NZ OCR, the cost of carry for the NZD will continue to rise,
representing an ever-increasing headwind.
On the global front, the US CPI will be released Thursday
night. Both annual headline and core CPI inflation are
expected to tick higher, with the USD sensitive to any
deviation away from expectations, either higher or lower.
There was little progress made on US-China trade
negotiations last week. If the next leg of talks plays out in
the open with further threats of tariffs doing the rounds
then that would be negative for risk currencies like the
NZD and AUD.
Elsewhere, the Bank of England is no longer expected to
hike rates, given the run of soft data and Governor Carney
going gun-shy. The next hike is now looking like well into
the second half of the year. The backtracking of UK rate
hike expectations has been a key influence on the softer
GBP of late. While NZD/GBP has range-traded over recent
months we continue to see medium term risk tilted to the
downside for the cross as Brexit risks gradually fade.
Net-Long Positioning In NZD, EUR And GBP Reduced
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
NZD AUD CAD EUR GBP JPY USD
@17-April @1-May
% of 3-yr max
Cross Rates and Model Estimates
Current Last 3 -weeks range*
NZD/USD 0.7084 0.7040 - 0.7400
NZD/AUD 0.9349 0.9320 - 0.9530
NZD/GBP 0.5142 0.5060 - 0.5220
NZD/EUR 0.5842 0.5800 - 0.6000
NZD/JPY 77.27 76.90 - 79.60
*Indicative range over last 3 weeks, rounded figures
BNZ Short-term Fair Value Models
Model Est. Actual /FV
NZD/USD 0.7190 -1%
NZD/AUD 0.9220 1%
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Page 7
Technicals
NZD/USD
Outlook: Downside risk
ST Resistance: 0.7160 (ahead of 0.7380)
ST Support: 0.6960 (ahead of 0.6890)
We see weak support around 0.6960 ahead of more rigid
trendline support at 0.6890 and more generally solid
support in the 0.68-0.69 zone. After the tumble over the
last 2 weeks, resistance levels are not currently
threatened.
NZD/AUD
Outlook: Downside risk
ST Resistance: 0.9400 (ahead of 0.9530)
ST Support: 0.9250 (ahead of 0.9050)
A sharp reversal sees the upward trend through to early
April likely broken. We see initial support around 0.9250.
NZ 5-year Swap Rate
Outlook: Neutral
ST Resistance: 2.82
ST Support: 2.5475
Range trade near term. Await break.
NZ 2-year - 5-year Swap Spread (yield curve)
Outlook: Neutral
MT Resistance: +60.8
MT Support: +40
Range trade expect +40 to hold now so put steepener on
near that level.
NZD/USD – Daily
Source: Bloomberg
NZD/AUD – Daily
Source: Bloomberg
NZ 5-yr Swap – Daily
Source: Bloomberg
NZ 2yr 5yrSwap Spread – Daily
Source: Bloomberg
Markets Outlook 7 May 2018
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Page 8
Quarterly Forecasts
Forecasts as at 7 May 2018
Key Economic Forecasts
Quarterly % change unless otherwise specified Forecasts
Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
GDP (production s.a.) 0.4 0.7 0.9 0.6 0.6 0.6 0.7 1.1 0.9 0.6
Retail trade (real s.a.) 1.4 1.4 1.8 0.3 1.7 1.0 0.7 1.3 1.3 0.7
Current account (ytd, % GDP) -2.2 -2.6 -2.6 -2.5 -2.7 -2.8 -3.1 -3.4 -3.4 -3.2
CPI (q/q) 0.4 1.0 0.0 0.5 0.1 0.5 0.5 0.8 0.4 0.7
Employment 0.9 1.1 -0.1 2.2 0.4 0.6 0.5 0.5 0.6 0.6
Unemployment rate % 5.3 4.9 4.8 4.6 4.5 4.4 4.4 4.4 4.3 4.2
Avg hourly earnings (ann %) 1.1 1.1 1.2 2.0 3.1 4.0 3.8 3.6 3.4 2.8
Trading partner GDP (ann %) 3.5 3.6 3.7 4.1 3.9 3.9 3.9 3.7 3.8 3.7
CPI (y/y) 1.3 2.2 1.7 1.9 1.6 1.1 1.6 1.9 2.2 2.4
GDP (production s.a., y/y)) 3.5 3.0 2.8 2.7 2.9 2.8 2.6 3.1 3.4 3.4
Interest Rates
Historical data - qtr average Government Stock Swaps US Rates Spread
Forecast data - end quarter Cash 90 Day 5 Year 10 Year 2 Year 5 Year 10 Year Libor US 10 yr NZ-US
Bank Bills 3 month Ten year
2017 Mar 1.75 2.00 2.70 3.25 2.35 3.00 3.50 1.15 2.50 0.80
Jun 1.75 1.95 2.45 2.95 2.25 2.80 3.25 1.25 2.20 0.75
Sep 1.75 1.95 2.45 2.95 2.20 2.70 3.20 1.30 2.20 0.75
Dec 1.75 1.90 2.35 2.90 2.20 2.65 3.15 1.60 2.40 0.40
2018 Mar 1.75 1.95 2.35 2.95 2.25 2.70 3.20 2.20 2.85 0.10
Forecasts
Jun 1.75 2.00 2.50 2.95 2.20 2.75 3.25 2.25 3.00 -0.05
Sep 1.75 2.00 2.70 3.20 2.35 2.95 3.50 2.45 3.25 -0.05
Dec 1.75 2.10 2.80 3.25 2.50 3.05 3.55 2.55 3.25 0.00
2019 Mar 2.00 2.35 2.95 3.35 2.75 3.20 3.65 2.65 3.25 0.10
Jun 2.25 2.60 3.25 3.65 3.05 3.20 3.65 2.75 3.50 0.15
Sep 2.50 2.85 3.45 3.80 3.30 3.20 3.65 2.75 3.50 0.30
Dec 2.75 3.10 3.60 3.90 3.45 3.50 3.95 2.75 3.50 0.40
2020 Mar 3.00 3.25 3.70 3.95 3.65 3.50 3.95 2.75 3.50 0.45
Jun 3.00 3.25 3.65 3.95 3.65 3.50 3.95 2.75 3.50 0.40
Exchange Rates (End Period)
USD Forecasts NZD Forecasts
NZD/USD AUD/USD EUR/USD GBP/USD USD/JPY NZD/USD NZD/AUD NZD/EUR NZD/GBP NZD/JPY TWI-17
Current 0.70 0.75 1.20 1.35 109 0.70 0.93 0.59 0.52 76.5 73.5
Jun-18 0.71 0.75 1.20 1.38 111 0.71 0.93 0.59 0.51 78.3 73.3
Sep-18 0.71 0.77 1.23 1.42 110 0.71 0.92 0.58 0.50 78.1 72.9
Dec-18 0.70 0.75 1.25 1.45 108 0.70 0.93 0.56 0.48 75.6 71.8
Mar-19 0.70 0.75 1.26 1.50 106 0.70 0.93 0.56 0.47 74.2 71.6
Jun-19 0.71 0.76 1.27 1.52 104 0.71 0.94 0.56 0.47 73.8 72.4
Sep-19 0.71 0.75 1.28 1.53 102 0.71 0.95 0.56 0.46 72.4 72.4
Dec-19 0.70 0.75 1.30 1.55 100 0.70 0.93 0.54 0.45 70.0 71.2
Mar-20 0.70 0.75 1.32 1.55 99 0.70 0.93 0.53 0.45 69.3 71.1
Jun-20 0.69 0.74 1.34 1.57 98 0.69 0.93 0.52 0.44 67.6 70.2
Sep-20 0.69 0.74 1.36 1.60 98 0.69 0.93 0.51 0.43 67.6 70.1
TWI Weights
14.0% 20.7% 10.3% 4.8% 6.8%
Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ
Markets Outlook 7 May 2018
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Annual Forecasts
Forecasts December Years
as at 7 May 20182016 2017 2018 2019 2020 2016 2017 2018 2019 2020
GDP - annual average % change
Private Consumption 3.9 5.4 4.1 3.8 2.3 5.0 4.5 3.9 2.7 1.4
Government Consumption 2.5 2.0 4.9 2.9 2.2 1.7 4.7 3.3 2.5 1.9
Total Investment 4.7 5.6 4.1 4.7 3.9 6.4 3.3 5.3 4.0 3.6
Stocks - ppts cont'n to growth -0.3 -0.1 -0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0
GNE 3.5 4.8 3.6 3.6 2.7 4.7 4.0 3.4 3.0 2.1
Exports 5.6 0.7 4.0 1.7 4.2 1.6 2.5 1.7 4.2 4.5
Imports 2.1 5.1 6.4 4.1 3.6 3.4 6.6 4.5 3.9 3.0
Real Expenditure GDP 4.4 3.6 3.2 2.9 2.8 4.1 3.0 2.9 3.0 2.4
GDP (production) 3.6 3.7 2.8 3.1 2.8 4.0 2.9 3.0 3.0 2.4
GDP - annual % change (q/q) 4.0 3.0 2.8 3.4 2.5 3.5 2.9 3.4 2.6 2.4
Output Gap (ann avg, % dev) 1.0 1.3 0.9 1.3 1.3 1.3 1.0 1.2 1.4 1.2
Household Savings (% disp. income) -1.3 -2.8 -2.4 -3.7 -3.4
Nominal Expenditure GDP - $bn 254.7 270.3 287.5 300.3 314.1 266.0 283.5 297.0 310.6 324.9
Prices and Employment -annual % change
CPI 0.4 2.2 1.1 2.4 2.0 1.3 1.6 2.2 2.0 2.0
Employment 2.0 5.7 3.1 2.2 1.6 5.8 3.7 2.2 1.9 1.2
Unemployment Rate % 5.2 4.9 4.4 4.2 4.3 5.3 4.5 4.3 4.3 4.5
Wages - ahote 2.5 1.1 4.0 2.8 2.7 1.1 3.1 3.4 2.8 2.4
Productivity (ann av %) 1.5 -1.9 -0.8 0.7 0.9 -0.8 -1.3 0.2 1.0 1.1
Unit Labour Costs (ann av %) 1.3 3.8 3.8 3.1 2.2 2.7 4.0 3.7 2.2 1.7
External Balance
Current Account - $bn -7.0 -7.2 -8.1 -9.7 -9.1 -6.0 -7.7 -10.2 -9.5 -8.6
Current Account - % of GDP -2.8 -2.6 -2.8 -3.2 -2.9 -2.2 -2.7 -3.4 -3.1 -2.6
Government Accounts - June Yr, % of GDP
OBEGAL (core operating balance) 0.7 1.5 1.0 0.9 1.6
Net Core Crown Debt (excl NZS Fund Assets) 24.5 22.2 23.3 23.2 22.2
Bond Programme - $bn 7.0 8.0 8.0 9.0 10.0
Bond Programme - % of GDP 2.7 3.0 2.8 3.0 3.2
Financial Variables (1)
NZD/USD 0.67 0.70 0.73 0.70 0.70 0.70 0.70 0.70 0.70 0.68
USD/JPY 113 113 106 106 99 116 113 108 100 97
EUR/USD 1.11 1.07 1.23 1.26 1.32 1.05 1.18 1.25 1.30 1.38
NZD/AUD 0.90 0.92 0.94 0.93 0.93 0.96 0.91 0.93 0.93 0.93
NZD/GBP 0.47 0.57 0.52 0.47 0.45 0.56 0.52 0.48 0.45 0.43
NZD/EUR 0.61 0.66 0.59 0.56 0.53 0.67 0.59 0.56 0.54 0.49
NZD/YEN 76.2 79.1 77.0 74.2 69.3 81.6 78.7 75.6 70.0 66.0
TWI 72.2 76.5 74.8 71.6 71.1 78.1 73.6 71.8 71.2 69.2
Overnight Cash Rate (end qtr) 2.25 1.75 1.75 2.00 3.00 1.75 1.75 1.75 2.75 2.75
90-day Bank Bill Rate 2.41 1.98 1.93 2.33 3.25 2.02 1.88 2.08 3.08 2.92
5-year Govt Bond 2.40 2.70 2.35 2.95 3.70 2.75 2.30 2.80 3.60 3.60
10-year Govt Bond 2.90 3.25 2.95 3.35 3.95 3.30 2.80 3.25 3.90 3.95
2-year Swap 2.30 2.30 2.25 2.75 3.65 2.40 2.20 2.50 3.45 3.40
5-year Swap 2.60 3.00 2.70 3.20 3.95 3.00 2.65 3.05 3.85 3.85
US 10-year Bonds 1.90 2.50 2.85 3.25 3.50 2.50 2.40 3.25 3.50 3.50
NZ-US 10-year Spread 1.00 0.75 0.10 0.10 0.45 0.80 0.40 0.00 0.40 0.45
(1) Average for the last month in the quarter
Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ
ForecastsActualsForecasts
March Years
Actuals
Markets Outlook 7 May 2018
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Key Upcoming Events
Forecast Median Last Forecast Median Last
Monday 7 May
Aus, NAB Business Survey, April +7
Aus, ANZ Job Ads, April flat
Jpn, BOJ Minutes, 9 Mar Meeting
Germ, Factory Orders, March +0.5% +0.3%
Tuesday 8 May
NZ, Crown Financial Statements, 9m-ended-Mar 2018
NZ, RBNZ 2yr Inflation Expectations, Q2 +2.11%
Aus, Federal Budget
Aus, Retail Trade, February +0.2% +0.6%
Aus, RBA's Boge Speaks
China, Trade Balance, April +CNY189b -CNY30b
Jpn, Household Spending, March y/y (real) +1.1% +0.1%
Germ, Trade Balance, March +€22.5b +€18.4b
Germ, Industrial Production, March +0.8% -1.6%
US, JOLTS Job Openings, March 6,075 6,052
US, NFIB Small Business Optimism, April 104.7 104.7
US, Powell Speaks, Monetary Policy
Wednesday 9 May
NZ, Concrete Production, Q1
NZ, Electronic Card Transactions, April flat flat +0.7%
Wednesday 9 May…continued
Aus, Consumer Sentiment - Wpac, May 102.4
US, PPI ex-food/energy, April y/y +2.4% +2.7%
US, Fed's Bostic Speaks, Economic Outlook
Thursday 10 May
NZ, Fin. Min. Robertson Speaks, Pre-Budget
NZ, RBNZ MPS 1.75% 1.75% 1.75%
China, PPI, April y/y +3.4% +3.1%
China, CPI, April y/y +1.9% +2.1%
Jpn, BOJ Summary of Latest Meeting, 27 Apr Meeting
Euro, ECB Economic Bulletin
UK, Trade Balance, March -£2.0b -£1.0b
UK, Industrial Production, March +0.2% +0.1%
UK, BOE Inflation Report
UK, BOE Policy Announcement 0.50% 0.50% 0.50%
US, CPI ex food/energy, April y/y +2.2% +2.1%
Friday 11 May
NZ, Food Price Index, April -0.3% +1.0%
NZ, BNZ PMI (Manufacturing), April 52.2
Aus, Housing Finance, March -2.0% -0.2%
US, Mich Cons Confidence, May 1st est 98.3 98.8
Historical Data
Today Week Ago Month Ago Year Ago Today Week Ago Month Ago Year Ago
CASH & BANK BILLS
Call 1.75 1.75 1.75 1.75
1mth 1.85 1.89 1.87 1.86
2mth 1.94 1.95 1.92 1.91
3mth 2.04 2.02 1.98 1.99
6mth 2.10 2.12 2.08 2.03
GOVERNMENT STOCK
03/19 1.81 1.81 1.75 2.09
04/20 1.89 1.88 1.90 2.30
05/21 2.06 2.06 2.07 2.46
04/23 2.35 2.37 2.34 2.73
04/25 2.60 2.64 2.60 2.97
04/27 2.79 2.84 2.78 3.07
04/33 3.16 3.21 3.17 3.35
04/37 3.34 3.39 3.39 3.59
GLOBAL CREDIT INDICES (ITRXX)
Australia 5Y 67 65 69 81
Nth America 5Y 62 61 65 62
Europe 5Y 56 54 57 63
SWAP RATES
2 years 2.28 2.27 2.25 2.35
3 years 2.44 2.44 2.41 2.59
4 years 2.60 2.59 2.56 2.79
5 years 2.74 2.73 2.69 2.95
10 years 3.22 3.21 3.14 3.44
FOREIGN EXCHANGE
NZD/USD 0.7022 0.7035 0.7306 0.6908
NZD/AUD 0.9309 0.9344 0.9492 0.9352
NZD/JPY 76.61 76.91 78.01 78.23
NZD/EUR 0.5871 0.5825 0.5930 0.6324
NZD/GBP 0.5188 0.5112 0.5171 0.5338
NZD/CAD 0.9022 0.9036 0.9277 0.9457
TWI 73.5 73.5 75.3 75.7
Markets Outlook 7 May 2018
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Page 11
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