RBNZ MPR Preview
We believe the RBNZ will ultimately ease much earlier than it currently assumes. But, equally, there are a number of conditions that will have to be met before it springs into action. We still reckon February 2025 is the most likely starting point but think that by November of this year the necessary conditions will be met for the RBNZ to give a clear indication of its intent to move early in the New Year.
More Slack Ahead
Lead indicators point to weak economic conditions continuing. That promises more economic slack opening up this year. Recent RBNZ research suggests that could have a bigger downward influence on inflation that before. But the Bank also sees opposing risk of inflation remaining persistent. Interest will be on inflation gauges in this week’s confidence surveys, but we’ll be watching the growth and labour market indicators too.
One After Another
We think this week’s Q1 GDP figures will be weak, but noisy. Even if growth can manage a positive sign in Q1, the latest run of indicators including the PMI and PSI suggest increasing downside risks to growth ahead. Softer demand indicators raise the chance that the RBNZ reduce the OCR earlier than projected. But components of inflation may keep the RBNZ wary in the near term. RBNZ Chief Economist to talk on inflation this week. A weak economy and a large current account deficit will remain on the radars of rating agencies.
GDP Preview: Still Struggling
The economy still looks like it is bumping along the bottom and contracting on a per-capita basis. The ‘partial’ indicators suggest GDP struggled to grow in Q1. A flat to negative outcome would be a touch lower than what the RBNZ had factored into its May MPS. On the inflation front, Friday’s selected prices for May will be assessed for guidance on Q2 CPI.
Oil, Power, and Growth Indicators
Any major deviation from our priors for this week’s range of GDP ‘partial’ indicators could have implications for our pick for Q1 activity, although shouldn’t change the main message of softness. OPEC+ and ComCom decisions suggest opposing forces for energy prices. The aluminium smelter deal looks growth positive.
Economy Pressuring Budget
A structural deficit and cyclical pressures make for an awkward backdrop for a Budget. But that is the current situation, leading into the Government’s Budget on Thursday. Given the economic pressures, we expect to see larger fiscal deficits and funding programme than published in the Half Year Economic and Fiscal Update (HYEFU).
Holding Tight
The RBNZ Monetary Policy Statement (MPS) is due for release on Wednesday. We expect the OCR to be held at 5.50%. On the outlook, we wouldn’t be surprised to see the RBNZ broadly repeat its previous messaging as it weighs up mixed data and ahead of known unknowns like the details of the Government’s Budget. Large net migrant inflows are cooling rapidly with implications for growth and inflation.
May MPS Preview
We expect the Reserve Bank’s view of the world, as espoused in its upcoming Monetary Policy Statement, will be largely unchanged from what it said back in April. Sure, inflation has been higher than it had anticipated and risks of further near-term upside remain but growth is surprising to the low and unemployment to the high indicating that any near term inflationary issues should dissipate in time.
Softening Affirmed
Last week’s Q1 labour market data affirmed our view of a softening market, and we see further softening ahead. Understandably, the RBNZ gave no sense of material surprise to last week’s information. Inflation information and the Budget look the more important events on the local calendar to shape the Bank’s view.
Employment Outpaced?
We expect this week’s HLFS to show an increase in employment and unemployment. We think labour supply is expanding faster than labour demand such that we think the unemployment rate will rise. This will put downward pressure on wage inflation. This week’s business survey looks prone to some general softening, but will the pricing indicators follow others downward? RBNZ’s FSR is due Wednesday.
A Peak Into Next Week’s Labour Market Data
Next week’s labour market reports are the next domestic data focus. We think they will generally confirm softening in the labour market, although not substantially different from what the RBNZ anticipate. Data this week is expected to show the annual trade deficit continuing to narrow, while consumer confidence is expected to remain weak.
Plain miserable
The last seven days has produced a simply miserable set of real economy data which has us questioning whether our expectations for an end-year turnaround are premature. The only redeeming feature is that the economic weakness supports our expectation that inflation will continue to trend lower. Indeed, we have revised down our Q1 pick for CPI inflation, published this Wednesday, to 0.6% delivering an annual 3.9%. It’s still above the RBNZ’s pick but not enough to cause it any great worry.
RBNZ In Wait and Watch Mode
We expect the RBNZ to hold the OCR at 5.50% this week. In our opinion, the Bank could easily cut and paste the policy assessment it delivered back in February. No change is the unanimous view of those in market polls and is fully priced by the market. Datawise, Tuesday’s QSBO will be well worth a look. We expect the business survey to confirm slack in the labour market, but we also have interest in its near-term indicators for pricing, activity, employment, and investment. Friday’s March price indexes will complete their guidance for Q1 CPI.