Recent economic developments have been a box of liquorice allsorts including sedate inflation, stronger New Zealand Dollar (NZD), balanced comments by Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler, better fiscal numbers, the potential for a new Free Trade Agreement (FTA) and ongoing signs of domestic data stabilisation.
Although interesting, these developments are not sufficient to alter our core economic views, with the overall story being consistent with a subdued but still reasonable economic picture. Domestic growth prospects appear to be stabilising, but sub-trend growth still beckons.
Interest Rate Strategy
Signs of stabilisation in the domestic outlook and a plateauing in inflation portend a period of near-term stability for short-end rates. Sticking points (higher NZD, potential structural shift in inflation, global challenges) still signal that the RBNZ could ultimately have to cut below 2.5%, but that’s a story for 2016.
Our bias remains for rates to head lower and to stay there for longer, underpinning further flattening pressure. Offshore markets have sharply pared back the likelihood of Fed tightening this year and the European Central Bank ECB have reaffirmed that they will probably do more; that NZD is positive and ultimately bullish NZ rate convergence with global peers. Local rates have joined the global rally, but there is considerable scope for spreads to narrow, with local bonds expected to outperform now that uncertainties over the 2033 syndication are out of the way.
Currency Strategy
NZD looks stretched up here with the level now entering into the zone of renewed relevance for monetary policy. However, Fed sentiment remains the primary driver for currency markets; as long as lift-off expectations continue to be pared (assuming risk-off does not develop), the NZD will be prone to grinding higher.
We favour fading NZD rallies with a December Fed lift-off still our central view. NZD/AUD looks similarly extended around 0.94 given a fully priced RBA (circa 46 bps of cuts) versus RBNZ 30bps.
Migration figures
After hitting an all-time high in February, visitor arrival numbers have tailed off slightly over recent months. In seasonally adjusted terms, they are around 6% below this February peak. The Statistics NZ trend measure is also now falling.
However, this is not something that alarms us overly. Part of the reason for the softer trend relates to the unwinding of some temporary factors that boosted arrivals numbers earlier this year including the likes of the Cricket World Cup and timing of the Chinese New Year, which saw Chinese arrivals surge an estimated 46% in seasonally adjusted terms in February. While this softer trend may persist for a while yet, overall we continue to hold high hopes for visitor arrivals growth as both cyclical factors (lower NZD) and structural factors (increased airline capacity and route development) boost prospects. Furthermore, for the tourism sector, it is not just about the number of arrivals, but also the amount they spend once they arrive and history suggests that the lower NZD should have a large positive impact on that front.
ANZ Job Advertising for September is being assessed to see whether the demand for labour has continued to soften or if there is any hint of stabilisation.
In August, seasonally adjusted job advertising fell 1.7% m/m, which was the eighth fall over the prior 12 months. While this weakness sounds stark, advertising is actually only flat compared to a year ago (on a three-month basis), consistent with a softening, but not a plunge (unlike during 2008/09, when job ads fell more than 50% y/y).\
Source: ANZ, Bloomberg, Statistics NZ
