Wednesday, May 4, 2016

NZ labour market in good shape

As is usual with the plethora of data that comes with quarterly labour market releases, there was something for everyone in today’s data.  That is best exemplified by the seemingly contradictory strong rise in employment, combined with a rise in the unemployment rate.  The conclusion is, however, that the New Zealand labour market is in pretty good shape.

Most interest today was in the unemployment rate.  We made the point at the release of December quarter data that the unemployment rate can be volatile and that while we didn’t believe the sharp fall to 5.3% in December (today revised up to 5.4%), neither did we believe the September reading of 6.0%; somewhere in the middle was probably the more accurate picture.  While the March result of 5.7% was higher than average market expectations of 5.5%, it is probably closer to the true rate than either of the two previous estimates.

It’s also important not to take the rise in the unemployment rate as a sign of labour market weakness.  Indeed the underlying tone of the data was strong.  Employment rose 1.2% in the quarter a result that took the annual rate of growth back up to 2.0% from 1.4% in the year to December.  Full-time employment was up 1.0% in the quarter.  That’s undeniably non-shabby.

The rise in the unemployment rate was the result of growth in the workforce combined with an increase in the participation rate which rose to 69.0, reversing some of the decline of the last few quarters.  That saw the labour force rise a spectacular 1.5% in the quarter.  While that resulted in a move higher in the unemployment rate it is, at the same time, a sign of a healthy well-functioning labour market.

It’s the recent phenomenon of solid employment growth being roughly match with growth in the supply of labour that has kept wage pressure and with that, underlying inflationary pressures, in check.  In fact the Labour Cost Index (for private sector ordinary time wage and sales earners) has been trending lower recently. However the annual rate of increase blipped higher in March to 1.8% from 1.6% in the year to December.  That’s still lower than the level that would be consistent with 2% inflation, but it now appears to be heading in the right direction.  The question is whether it is sustained and only tome will answer that.

This result doesn't preclude further easing from the RBNZ but reinforces for us that whether they go or not will largely be determined by their level of (dis)comfort with the exchange rate.  In that respect yesterday’s EXPECTED (at least by AMP Capital) rate cut in Australia could have a more meaningful bearing on decisions at the June MPS.

Thursday, April 28, 2016

Is this the bottom?

The Reserve Bank of New Zealand left the Official Cash Rate unchanged at its record low level of 2.25% this morning.  We had thought the recent strength in the exchange would be enough to see them pull the trigger.  Clearly not.

While most of the market expected no change today, many had expected that to come with an enhanced easing bias which was not for forthcoming either.  The Bank stuck to the line that further easing may be required, the same as the March statement.

In its statement the Bank acknowledged indications that house price inflation may be picking up and signalled their expectation that inflation will strengthen as the effects of low oil prices drop out and and as capacity pressures gradually build.  It was for these reasons we thought the Bank wouldn't cut in March and when they did, that the next easing would probably come sooner rather than later.

The overall positive tone to much of the Statement suggests we are likely at the bottom of the easing cycle.  We concur with the Bank that inflation heads higher from here and we expect the housing market to remain tight and problematic.

The one qualification to that remains the exchange rate.  While its wasn't enough for them to move today, we think that remains the most likely factor that could yet force the Bank's hand.

In that respect the Bank knows it's the against the Australian dollar where they can probably have most influence.  The interesting development on that front was yesterday's lower than expected CPI out turn in Australia which has our team in Sydney expecting the Reserve Bank of Australia to cut interest rates next week, so keep an eye on the NZD/AUD cross.

Tuesday, April 26, 2016

Four things the RBNZ will be thinking about in deciding whether to cut this week

When the Reserve Bank of New Zealand (RBNZ) surprised the market with its decisions to cut interest rates in March, it flagged another rate cut was on the way. Usually we would say “just do it”, but the decision whether to cut again this week appears more finely balanced. So what are the things the Bank will be thinking about in the lead-up to Thursday…?

Inflation: The March quarter CPI was bang-on RBNZ expectations, though the mix of tradeable versus non-tradeable inflation showed greater than expected pressure in the latter. In fact non-tradeable inflation has now risen 1.5% over the last six-months. Non-tradeable inflation (ie domestic inflation pressure) is more important for setting monetary policy. But at an annual rate of 1.6%, non-tradeable inflation was still lower than the 1.8% recorded in the year to December.

The exchange rate: At the time of March rate cut the Trade Weighted Exchange Rate Index (TWI) was around 72.5 and the RBNZ assumed an average of 70.9 for the June quarter.  So far it has averaged around 72.7.  All else being equal (and assuming the TWI stays at current levels for the remainder of the quarter) that would shave around 0.3% off inflation in 12-months time.   Part of the strength in the NZD/USD has been the recent weakness in the USD as the US Federal Reserve has recalibrated from four interest rate increases this year to two.  We think the Fed will raise rates again in June which will see some recovery in the USD and downside for the NZD, but we think we have seen already the highs in the USD for this cycle.

Housing: We weren’t expecting the RBNZ to cut interest rates in March. Our view was that given much of the reason for current low inflation was (arguably) outside the control of the RBNZ, the higher-inflation reward from lower interest rates wasn’t worth the risk to financial stability of inflaming the housing market. Indeed, household debt continues to rise, fuelled in part by record low interest rates. As it turned out, the Bank was reasonably sanguine about the housing market in March, no doubt reflecting a softening in both price and activity data following the introduction of measures to cool the housing market last year. The question is the extent to which they have been surprised by the recent renewed strength in the market, or are relaxed given their ability to deploy other (macro-prudential) tools from their tool-box.

Growth: GDP growth was stronger than the RBNZ was expecting at the end of last year, but there was probably nothing in that result itself that will alter the Bank’s forecasts for the period ahead. Some of the more recent partial data has been a bit stronger than we were expecting (migration, tourism flows, dairy prices), but then our 2016 GDP forecasts are lower than the Bank’s so these results might have been less of a surprise to them!! Add to this, the downside risks to global growth have diminished further since March, notably in China.

All things considered, it’s a close call as to whether the Bank cuts this week. But it’s the recent strength in the exchange rate along with consistency of approach that gets us just over the line in expecting them to cut the OCR to a new record low of 2.0% on Thursday. Furthermore, if they don’t cut this week, it will likely prove to be for reasons that mean there is a reasonable chance we may have seen the low in interest rates for this cycle. 

Monday, April 18, 2016

CPI bang on RBNZ forecast

The March 2016 quarter CPI came in a touch higher than market but bang on Reserve Bank of New Zealand (RBNZ) expectations.  Headline inflation rose 0.2% for an annual rate of 0.4%.  The annual rate is up from 0.1% in the year to December 2015.

The major contributors were broadly as expected with falling airfares and petrol prices keeping overall inflation subdued over the quarter while on the other side of the equation we are finally starting to see some flow through into prices from prior falls in the exchange rate.  There’s only so much margin pressure retailers can take!

While the overall result was in line with RBNZ expectations, the mix was a bit different in that tradeables inflation was a touch weaker than expected while non-tradeables was a bit stronger.  Non-tradeables inflation (i.e. domestically generated inflationary pressures) is more important for the setting of monetary policy.

That said this result shouldn’t derail the RBNZ from delivering its next already-flagged 0.25% interest rate cut.  The question is mostly about timing.  Slightly stronger domestic inflation along with recent data showing some renewed strength in the housing market may see the Bank choose to muse beyond next week’s OCR review and wait until they have rerun all the numbers for the June Monetary Policy Statement.  More on that soon.