Activity Rising; Uncertainty Heightened
The RBNZ met our and market expectations with last week’s 50 point cut and commentary. The Bank displayed comfort with looking through a near term forecast lift in inflation, as a negative output gap weighs on core inflation. However, activity indicators are improving and need to be watched closely. Today’s Q4 retail sales surprised on the high side, nudging up our estimate of Q4 GDP. Meanwhile, uncertainty measures are elevated and need to be respected.
All Eyes on the RBNZ
We expect the Bank to lower its cash rate by 50 basis points to 3.75%, at Wednesday’s meeting. Such a cut is the very widely held consensus view. And markets are pricing a 50-point cut as all but a done deal. It would be a massive surprise if the RBNZ did anything but deliver. The big interest for markets is what the Bank will intimate about its future rate track. Meanwhile, the PMI and PSI have finally shown some signs of life. Near term inflation looks a bit higher on tradeable prices, while non-tradeable inflation looks to be easing sharply.
February MPS Preview
Immediately following the November Monetary Policy Statement Governor Orr (MPS) suggested that if New Zealand’s economic evolution turned out broadly as expected the Bank would deliver a 50 basis point cut at the February MPS. While uncertainty has risen (largely thanks to the installation of one Donald Trump), domestic data has been revised (sometimes aggressively) and domestic government policy changes are flying thick and fast, it still seems to us that the broad trajectory of the economy is where the Bank expected it to be. Additionally, financial markets are pricing a 50 point cut as almost a done deal. On these bases, it would be massive surprise if the RBNZ did anything but deliver.
Labour Market Still Softening
As the world watches the opening salvos of a trade war, initiated by the US, there is an obvious risk that domestic proceedings play second fiddle. Nonetheless, there are some important releases to monitor. Q4 labour market data is expected to show a further softening in the labour market, including a lift in the unemployment rate.
Exports Lifting; Labour Market Lags
There is no top tier data due in the week ahead, but a decent smattering of timely monthly indicators and an RBNZ speech to pique some interest. Labour market indicators are expected to remain soft, while a lower NZD and higher commodity prices are improving export prospects. We nudge our milk price forecasts higher. Confidence and inflation expectation updates due.
Inflation Close To Target, But
Domestic focus this week will be on the Q4 CPI due out tomorrow. We think inflation is under control but there are areas to watch. More so regards 2025 than in this week’s figures, although the starting point is always relevant. The PMI and PSI remain moribund suggesting the output gap continues to widen, while electronic card transactions add to thoughts of a turn upward in spending. Globally, eyes are on the US as Trump is sworn into office.
Economic Turning Points Are Messy
Economic growth is expected to start recovering this year. But we caution that it might not feel like recovery for a while because even as activity increases it is likely to remain below potential for some time yet. Nothing there to stand in the way of more monetary easing. However, there is more upward pressure on near term inflation via a lower NZD and higher oil prices over the NZ summer break. We don’t think a 50-point cut by the RBNZ in February is a done deal, but there is still a lot of water to go under the bridge yet. This week’s QSBO, Selected Price Indexes, and PMI are the key releases still to come.
The Christmas Rush: GDP, HYEFU And All That
The week before Christmas traditionally brings a heap of economic news and data in NZ. This year is no different. Q3 GDP and the Government’s Half Year Economic and Fiscal Update (HYEFU) are headline grabbers. We see GDP at -0.4% q/q but warn of significant revisions. HYEFU will reflect economic pressures with deficits forecast and heightened funding requirements. November’s Selected Prices are already out and keep our Q4 CPI pick a bit above the RBNZ’s view. And there’s a ton of other data with PSI already out and the Balance of Payments, Merchandise Trade, and no less than three confidence surveys due. Merry Christmas!
Q3 Contraction Likely
As the ‘partial’ indicators for Q3 GDP tickle in, we haven’t seen anything yet to dissuade us of our long-held view that the economy contracted in that quarter. This week’s manufacturing, wholesale, and services data have the potential to fine tune Q3 GDP estimates, but it would take a material surprise to alter a general sense of softness. There’s a bunch of monthly indicators to monitor this week too.