November MPS Preview
Reasonable people could present sound arguments for rate cuts of 25, 50 or 75 basis points at the upcoming MPS. We’re sticking with a 50 point move but acknowledge the risks.
Trumped!
With all the noise surrounding the US election, we thought it worthwhile trying to summarise the likely impacts on the New Zealand economy following Trump’s resurrection. That said, we are very wary there may yet be a big void between what has been said in the run up to the election and what policy will actually be introduced so any predictions of likely outcomes, including this one, should be taken with a bucket load of salt.
Labour Market Loosening
This week’s data is expected to simply add confirming evidence of a loosening labour market. We expect the unemployment rate to rise to 5.0% in Q3, along with a quarterly decline in employment and the participation rate. Wage inflation is forecast to slow. None of this should come as a major surprise to markets, nor the RBNZ, with our forecasts similar to market medians and RBNZ’s projections. The RBNZ’s full Financial Stability Report is due out tomorrow, while Thursday’s Crown Financial Accounts for the 3 months to September will show how the fiscals are tracking against Budget baselines.
RBNZ Likes What It Sees
RBNZ Governor Orr’s speech, Q&A, and media interview last week made for some interesting reading and listening. It was good to hear the Governor’s thoughts. Data and events will continue to shape the policy outlook. Today’s filled jobs data for September were consistent with a deteriorating labour market and we expect more of the same in next week’s Q3 official figures. This week’s business survey will be mostly monitored for the latest on firms’ activity outlook, employment intentions, and inflation gauges. The RBNZ is scheduled to give an update on the housing market.
Next rate cut 75?
With recent market chatter of whether the RBNZ will cut 75bps or not in November, we thought we’d have a quick look at when previous RBNZ moves of 75bps or more occurred and why. We found three reasons. There is limited local data on the calendar this week, but a few RBNZ speakers to listen too.
CPI Preview: Back in the Band
The Q3 CPI is due out on Wednesday. It is highly likely to show another large drop in annual inflation putting it back inside the RBNZ’s target band for the first time since Q1 2021. We expect annual inflation to drop to 2.3% in Q3, from 3.3% in Q2. This matches the RBNZ’s published forecast. This would support further relaxation of monetary policy restraint. So do does ongoing subdued activity indicators with the latest PMI, PSI, and electronic card transactions data playing to that theme.
OCR Down But How Much?
The RBNZ is expected to lower the OCR on Wednesday. We favour a 50bp move, but it is a close call between that and a 25bp reduction. The latest incremental information has provided no more clarity. The Government’s full year accounts will reveal the exact size of the FY2024 deficit. Friday’s selected prices for September will add guidance to Q3 CPI, while the PMI will provide its usual guide to conditions in the manufacturing sector.
All Eyes On The QSBO
NZIER’s Quarterly Survey of Business Opinion (QSBO) tomorrow is the final major domestic data release scheduled ahead of the RBNZ’s October rate decision next week. It has the potential to change views. There are no polls for the QSBO, but it will be closely followed. Inflation and employment indicators will be among those of most interest to us.
Trade Subdued
Today’s August trade figures looked a lot like the economy overall, weak. Both exports and imports were marginally lower than a year ago. The annual trade deficit continues to narrow, despite an aircraft import boost and export dent from energy sector issues appearing. A strong dairy season outlook will support exports ahead. Job ads continue to trend lower. Consumer confidence update due.
GDP to confirm economic struggle
This week’s GDP figures are expected to confirm economic weakness in Q2. It seems probable that the economy contracted in the quarter, and seems likely the contraction is no more than the -0.5% q/q built into the RBNZ’s August MPS. Something along these lines would support the case for further easing in monetary restraint but no reason for the Bank to see the need to quicken the pace of easing restraint beyond what it has already outlined. Of course, other factors may yet do so. We see the annual current account deficit narrowing to 6.3% of GDP from Q1’s 6.8%.
Partial Indicators To Guide On GDP
Forward-looking and timely high frequency data have tended to be ‘less bad’ of late and some have even turned outright positive. But this week’s backward-looking Q2 figures for manufacturing, wholesale trade, and services are expected to back our view that GDP contracted in that quarter. The PMI and ECT will give guidance on activity in August, while Selected Prices for that month will further shape thoughts on Q3 CPI.
GDP looking sick
It comes as no surprise to us that both business and consumer confidence were reported to have risen in August. The drop, and expected further falls, in the OCR were undoubtedly going to engender a widespread sigh of relief. Rate cuts are almost always a harbinger of better times ahead. The problem, of course, is that the set of circumstances that allows rates to be cut in the first place is usually an indication of economic malaise. And it will take some time for that malaise to be assuaged by easing monetary conditions.
A confidence bounce?
With interest rates falling it’s likely confidence, both consumer and business, will start to move higher. In the first instance just removing the fear of higher rates from those who are under the pump will be a huge weight off the shoulders of many. For others it will not be long before there are genuine cash flow impacts as their mortgages reset at lower levels. For corporates this will be a while longer but future rate relief will still be greeted with open arms.