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BNZ Weekly Overview
10 March 2011
Mission Statement
To help Kiwi businesspeople and householders make informed financial decisions by discussing the
economy and its implications in a language they can understand.
In this week’s issue….
Monetary Policy Eased
1
Housing Market Update
12
Is Our Economy Getting Better?
5
Major Offshore Issues
14
Interest Rates
9
Foreign Exchange
15
The Weekly Overview is written by Tony Alexander. The views expressed are my own and do not purport to
represent the views of the BNZ. To receive the Weekly Overview each Thursday night email me at
[email protected] with ‘Subscribe” in the Subject line.
Monetary Policy Eased
The Reserve Bank this morning cut its official cash rate as we expected by 0.5% back to the record low of
2.5% reached in April 2009 as they were responding to the global financial crisis. They logically have cited
the weakness in economic activity produced by the February 22 earthquake as prime reason for the cut
but also note as we have been noting that even before that terrible event the economy was proving to be
weaker than hoped for just three months ago. Consumers have cut spending on housing and retailing
while rising farm incomes are predominantly leading to debt reduction rather than increasing spending.
The Reserve Bank note that future monetary policy decisions will be guided by the data (as opposed to a
particularly strong view regarding what happens 12-18 months down the track) but that they anticipate
removing “current monetary policy accommodation” once the post-earthquake rebuilding phase
materialises. Normally one would be able to interpret what this means for monetary policy by looking at the
usually detailed RB economic forecasts. But this time around in light of the massive uncertainty regarding
the impact of the earthquake on economic activity they have cut back their presentation and note the
numbers they provide should not really be thought of this time as forecasts but the scenario underpinning
the decision to cut the cash rate. But for the record they appear to have pencilled in cash rate increases of
about 1.25% over 2012 then another 0.5% over 2013.
But we repeat our very long running warning. One would be extremely unwise to develop an interest rate
risk management strategy in the current and prospective economic environment on the basis of any
particular set of interest rate forecasts. These forecasts have changed substantially over the past three
years and will almost certainly continue to do so over the coming three.
The rate cut and the words were almost exactly as we and the markets were expecting so the impact today
on interest rates and the exchange rate has been limited. But now that a rate cut is confirmed it is fairly
clear that recent cuts in fixed home loan rates will be followed by a sizeable cut in floating rates and that
will be of benefit to many people with some 50% of mortgage volume now sitting at a floating rate.
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BNZ WEEKLY OVERVIEW
Outflows To Australia – Away They Go
One of the key points we are hammering is that courtesy of the large unemployment rate and exchange rate
gap plus a few other factors thrown in there will be a very very large surge in net migration outflows to
Australia over the coming month. (Email me at [email protected] if you want a copy of our paper
examining this issue.) In January this year the net outflow was a whopping 3,518 which is the biggest one
month loss since January 2009 – meaning that January usually produces a big number.
NET MIGRATION FLOWS NZ vs. AUSTRALIA
15000
12 month total
0
-15000
-30000
Net loss
Source : Statistics NZ
-45000
79
81
83
85
87
89
91
93
95
97
99
1
3
5
7
9
11
But the annual net outflow now stands at 22,378 from 16,019 a year ago. We are headed probably quickly
back to then beyond the net loss of 35,000 seen in late – 2008 and if employers have not given thought to
this factor and instead just focus on the high NZ unemployment rate of 6.8% they are going to find
themselves badly positioned about 12-18 months from now – especially once Christchurch rebuilding starts
sucking up anyone who can hold a hammer.
Irish Eyes Not Looking This Way
Just for your guide and because this issue crops up in a positive sense in the Australian media now and
then, there is zero evidence that the Irish fleeing their country are heading our way. Over the year to January
the gross inflow of Irish here was only 1,295. This was down from 1,628 a year earlier and in the January
quarter gross inflows were 11.3% lower than a year earlier. How bad does one’s country have to be for
fleeing Irish not to want to come here!
MIGRATION TO NZ FROM IRELAND
70
1800
%
1600
Annual total
lhs
1400
60
50
40
1200
30
1000
20
800
10
0
600
3 month change
vs year ago
rhs
400
-10
-20
200
-30
0
-40
7
8
9
10
11
The Petrol Burden
For your guide, in the year to June 2010 the average NZ family spent $40.90 a week on petrol. Over the
year petrol prices averaged $1.70 for 91 octane fuel. If prices soon settle at $2.20 then average weekly
expenditure in the absence of any behavioural change will be almost $53. Average weekly household
income over the year to June 2010 was $935. The trouble with these numbers however is that they cover
every single household in the country whereas we all have specific household characteristics. Families will
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BNZ WEEKLY OVERVIEW
have extra petrol costs due to taking the children to and from school, sports events, weekend birthday
parties and so on. Realistically then all one can say without getting into the deep household sub-group
categories contained in the Statistics NZ Household Economic Survey is to note that on average our petrol
costs are ahead about 30% from where they were last June year and because changing behaviour is difficult
(witness Lindsay Lohen and Charlie Sheen), we will pay for the extra petrol by cutting spending elsewhere.
We have had a very subdued outlook for retailing over 2011 for some time now and can only reinforce our
comments that retailers should not think in terms of managing their businesses in a growing environment but
in terms of emphasising most profitable products, those with pricing power and so on. Only believe that
customers are flocking back once you have seen the whites of their eyes for perhaps three solid months in a
row.
Having said that there will be boosts for many in Christchurch once people start using insurance payouts to
refurnish their houses – if they are habitable.
NZ PETROL PRICES
240.0
220.0
cents
91 octane per liter
200.0
180.0
160.0
140.0
120.0
2006
2007
2008
2009
2010
2011
100.0
3/3
6/1/1
11/11
16/9
22/7
27/5
31/3
4/2
10/12
15/10
20/8
25/6
30/4
5/3
8/1/0
13/11
18/9
24/7
29/5
3/4
7/2
13/12
18/10
23/8
28/6
3/5
8/3
11/1
16/11
21/9
27/7
1/6
6/4
9/2
15/12
20/10
25/8
30/6
2/5
10/3
13/1
18/11
23/9
29/7
3/6
If you want historic petrol price data including importer margins etc download the Excel file from here.
http://www.med.govt.nz/templates/MultipageDocumentTOC____39564.aspx
Damage Guesses
NZ Treasury this week released their regular monthly overview of the NZ economy and like ourselves noted
that even before the earthquake the domestic part of the economy was turning out to be weaker than they
had been thinking back when they compiled their previous set of economic forecasts in December. They
note that farmers are paying down debt rather than spending their rising incomes, that consumers generally
are doing the same, and that demand for labour is weak though income growth is picking up.
Treasury make two cost estimates of the earthquake. The first relates to the damage caused by the two
earthquakes They estimate that together the two Christchurch earthquakes have caused $15bn worth of
damage give or take $5bn made up as residential $9bn, commercial $3bn, and infrastructure $3bn.
Rebuilding damaged structures is expected to commence in 2012 and occur over a number of years.
Second they estimate that the latest earthquake by itself will cause the economy to grow by 1.5
percentage points less than otherwise. That is, before the earthquake they expected the economy in the
December quarter of this year to be 3.5% bigger than the December quarter of last year. Now they estimate
that the rise will be only 2.0%.
Both of these estimates are just that – estimates – and there are plenty of others which need to be made.
For instance the government’s revenue will suffer because of the weakening of economic activity. The
current account will shift into surplus for the first time since 1973 because of the money flowing in from
offshore reinsurance (some $6bn). Unemployment will be higher than otherwise this year. Government
spending will clearly be higher but at this stage an estimate of the rebuilding cost to the government has yet
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BNZ WEEKLY OVERVIEW
to be made. One could say the same for the Christchurch City Council, for Christchurch businesses, and for
Christchurch homeowners.
Rebuilding from the September 4 event was taking longer than anticipated to start and Treasury, like the
Reserve Bank, estimate that during the December quarter the economy recorded no growth rather than the
0.9% growth they were forecasting just three months ago. They also reckon we will record shrinkage for the
March quarter.
Tractor Regos A Good Proxy
Don’t laugh. About once a year we get contacted by someone criticising our use of registration data to
describe what is happening with tractor purchases. It is true that sales and registrations are different things
but despite many requests no-one has been able to supply us with a regular timely series of tractor sales.
This week someone did so we now have monthly sales data from January 2004. That means we can have a
proper look at whether it is valid to look at short term changes in tractor registrations and imply tractor sales
are probably doing the same thing. The answer is yes.
This first graph shows three month totals for regos and sales. The series move together over a strong
seasonal pattern but with the gap between sales and registrations all but gone now. If a farmer can tell us
why tractors they buy nowadays are usually registered whereas they were not in the past that would be
handy.
TRACTOR SALES AND REGISTRATIONS
600
3 month
500
Sales
400
300
200
Registration
s
100
Sources:NZTA, TAMA
0
04
05
06
07
8
9
10
11
This second graph consists of our roughly estimated seasonally adjusted rate of change in three month
tractor sales. We have already reported our estimate of a 20% rise in tractor regos over the three months to
January. For sales we estimate a 15% rise. The numbers three months earlier were -4% and +5%
respectively, and three months before that +4% and +8%. So broadly speaking the series move together
give or take 5% - 10% differences which given the high volatility in these monthly numbers and the fact we
only tend to highlight the numbers when the changes are large is not a big deal.
ESTIMATED THREE MONTH SEASONALLY ADJUSTED CHANGES
30
25
%
Tractor registrations
20
15
10
Tractor sales
5
0
-5
-10
-15
Sources:NZTA, TAMA
-20
10
F
M
A
M
J
J
A
S
O
N
D
11
So now we can all get some sleep. One point though, for want of anywhere else to put it – how many
Australian farmers are going to be looking ahead for the next couple of decades and thinking about the
difficulty of running a profitable export-focussed business in Australia when the AUD will be kept high by
Page 4
BNZ WEEKLY OVERVIEW
mineral resource prices? Will we see a flow of farmers back to New Zealand on top of the general investor
interest in securing agricultural assets caused by expectations of rising world food demand?
In fact there is also another factor in play here which those involved in NZ’s farming sector may want to keep
an eye on. In Australia the large supermarket chains have slashed their milk prices to $1 a litre. This is great
for consumers but the dairy industry is up in arms because in spite of the protestations from the
supermarkets that they are merely loss-leading the expectation is that such terrible discounting of a basic
food item vital to household health will lead to lower prices being paid to Australian dairy farmers. Unlike NZ
where some 90-95% of milk is exported in Australia only 45% is sent offshore.
http://www.dairyaustralia.com.au/Our-Dairy-Industry/Industry-Statistics/Export-Summary.aspx
Is Our Economy Getting Better or Worse?
In this simple summary section we look only at what the data are actually telling us and pay no attention to forecasts or
intentions measures.
This section is proving very useful in picking what is happening out there and it is noteworthy that for the
next wee while the Reserve Bank intend basing their monetary policy decisions on what the data are saying
rather than what may necessarily lie down the track. This week we have learnt that earlier growth in car
registrations has faded so if car registrations are a guide to consumer spending (dubious) then they are
saying new restraint has crept in. We have also seen only a small recovery in dwelling consents issuance in
January of just half December’s big 18% seasonally adjusted fall. So house building remains in recession
and the trend is still down. But businesses do appear to be increasing their spending on commercial vehicles
though earlier growth in tractor registrations has faded away. And though we caution that these data are
volatile, the value of retail Electronic Card Transactions fell only 0.2% in February whereas the earthquake
would have stripped at least 1% off. So lets call retail spending growth flat for now rather than falling.
Are householders opening their wallets more?
In February there were 11,371 cars registered around New Zealand. And so it starts. We need to where
possible try and make some adjustment to the data for the February 22 earthquake. Over the previous five
years between January and February in Christchurch car registrations have fallen by between 68 and 192
averaging 151. This year the decline was 482. That sounds unusually large so there may be a particular
regular weekly pattern to regos which we are not aware of. So lets add not 331 back in (482 less 151) but
just 200 and see what the data now say.
At 11,571 nationwide car registrations in February were up almost 5% from a year ago and in the three
months to February compared with the three months to November there was a roughly calculated 1%
seasonally adjusted fall in car registrations. Therefore, with the three month number of regos 11% below
average for the past six years and a small fall in the past three months whereas the three month change to
January was +5% s.a., we can reasonably say that if this statistic reflects what consumers are doing with
their money it shows easing spending on cars.
But just to perhaps make things clearer, if we look only at the North Island then seasonally adjusted car
regos were ahead 3.7% from the three months to November whereas the same calculation ending in
January showed growth of 6.6%. The recent weakness therefore is largely in the South Island and the
conclusion we draw is this. There is mild improvement underway in car registrations but we cannot know to
what extent this is driven by consumers and to what extent by businesses. At least there is growth. For your
guide the South Island rough s.a. change for the past three months was a fall of 11% even with 200 added
back in to the Christchurch total.
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BNZ WEEKLY OVERVIEW
CAR REGISTRATIONS
15
CAR REGISTRATIONS
260000
% change in three month
sum seasonally adjusted
10
240000
12 month total
220000
5
200000
0
180000
160000
-5
140000
-10
120000
-15
100000
Source:NZTA
Source:NZTA
80000
-20
3
4
5
6
7
8
9
10
91 92 93 94 95 96 97 98 99 0
11
1
2
3
4
5
6
7
8
9 10 11
With regard to house construction the news remains bad. Although in seasonally adjusted terms the number
of consents issued for the construction of new dwellings improved 9.6% in January this followed an 18.2%
fall in December and means that in the three months to January consents were down 2.9% seasonally
adjusted from the three months to October and 14.5% down unadjusted from a year ago. For houses only
(no apartments) the three month fall was a large 9.6%.
43000
DWELLING CONSENTS ISSUED
DWELLING CONSENTS ISSUED
30
Source: Statistics NZ
38000
12 month total
20
10
33000
0
28000
-10
23000
-20
18000
3 mths on previous 3 mths using
seasonally adjusted numbers
-30
Source: Statistics NZ
13000
-40
74 76 78 80 82 84 86 88 90 92 94 96 98
0
2
4
6
8
10
8
9
10
11
The trend in dwelling consent issuance is decidedly downward so one can comfortably say that the sector
remains in recession with the annual number of consents at 15,427 now the lowest since March last year
and not much above the four decade low of 13,616 reached in September 2009. It will be touch and go
whether the annual total hits that level again.
This morning we learnt that the value of Electronic Card Transactions in February in seasonally adjusted
terms was down only 0.2% from January – or by 0.6% excluding cars and petrol. The 0.2% fall followed a
2.4% rise in January and means over the past three months retail spending growth has been a reasonable
6.4% annualised. But there is an upward distortion from rising petrol prices and the core measure has grown
at an annualised pace of only 0.5% the past three months.
ELECTRONIC CARD TRANSACTIONS
14
12
ECT Core
Retail
10
8
Average
6
4
% s.a. 3 month changes
annualised
2
0
Source : Statistics NZ
-2
4
5
6
7
8
9
10
11
We think it is reasonable to look at the numbers and conclude that February’s fall was less than it could have
been given the earthquake, but underlying it all the trend is for flat retail spending growth.
Page 6
BNZ WEEKLY OVERVIEW
Is business output rising?
We have not received any data apart from inward visitors this week but I’m working on a model for
estimating spending of tourists so will wait until that is completed before adding tourism again.
Are businesses hiring more people?
No new evidence this week.
Are businesses boosting their capital spending?
One piece of information we use to try and answer this question is registrations of commercial vehicles. In
February such registrations were 14% ahead of a year ago at 1,737 units. In the three months to February
regos were ahead 13.3% from a year ago and seasonally adjusted they were ahead 11% from the three
months to November. There is underlying growth occurring in this measure of business activity and that is
good.
COMMERCIAL VEHICLE REGISTRATIONS
20
COMMERCIAL VEHICLE REGISTRATIONS
40000
12 month total
10
35000
0
30000
-10
% 3 months change
seasonally adjusted
-20
25000
20000
-30
Source:NZTA
Source:NZTA
-40
15000
3
4
5
6
7
8
9
10
11
98
99
0
1
2
3
4
5
6
7
8
9
10
11
In addition, in February there were 137 tractors registered around the country which was a rise of 9% from a
year ago and a seasonally adjusted gain of about 3% in the past three months. We would call that a flat
result. This means that although the sector is coming off its lows the recovery is as we noted last week for
wider rises in farmer spending, very mild. There is no justification at this stage for saying farmers are
spending up large – not when farm debt between September and January fell by $459mn. Last year over the
same time it fell $162mn, the year before it rose $1.8bn and the year before that in 2007-08 it rose $1.3bn.
TRACTOR REGISTRATIONS
40
% change in three months
seasonally adjusted
30
TRACTOR REGISTRATIONS
3500
12 month total
20
3000
10
2500
0
-10
2000
-20
1500
-30
Source:NZTA
Source:NZTA
-40
1000
1
2
3
4
5
6
7
8
9
10
11
98
99
0
1
2
3
4
5
6
7
8
9
10
11
This week we learnt that the value of consents issued for the construction of non-residential buildings was
$228mn in January. This was practically the same as a year earlier and meant for the year to January
consent values were 14% down from the year to January 2010.
Page 7
BNZ WEEKLY OVERVIEW
NON-RESIDENTIAL BUILDINGS
ALL NON-RESIDENTIAL BUILDINGS
5000
60
% change in three month
value of building permits
compared with a year earlier
50
40
30
$m annual total value of
building consents issued
4500
4000
20
10
3500
0
-10
3000
-20
-30
2500
-40
Source: Statistics NZ
Source: Statistics NZ
-50
2000
2
3
4
5
6
7
8
9
10
97
11
98
99
0
1
2
3
4
5
6
7
8
9
10
11
Our interpretation of these numbers is that they show the value of non-residential building consents
flattening out after a period of decline, but that there is no upturn in place. However we have a problem.
Other data released during the week in the form of the Building Work Put in Place release show that the
seasonally adjusted volume of non-residential construction actually jumped by an unexpectedly large 10.6%
in the December quarter. This is the fourth quarterly rise in a row and means activity was 18.8% ahead of
the December quarter 2009. So should we in fact be writing that this sector is experiencing strong growth?
NON-RESIDENTIAL CONSTRUCTION GROWTH
15
10
% quarterly
5
0
-5
-10
% annual
average
-15
7
8
9
10
Actually it has been strong recently, but there is a strange inconsistency at the very right hand side of the
following graph between the annual average change in consent values and the same change in actual
construction. What that says to us is that a lot of work has just been done on something perhaps consented
some time ago. All we can identify as being unusually strong during the December quarter was construction
of hospitals and nursing homes (ahead 94% from December quarter 2009), and factories and industrial
buildings ahead 49%.
BUILDING WORK PUT IN PLACE
80
% annual average
growth
60
40
Consent values
20
0
-20
Non-residential
nominal
Source: Statistics NZ
-40
92
93
94
95
96
97
98
99
0
1
2
3
4
5
6
7
8
9
10
We are going to run for now with the theory that some lumpy stuff was caught up on and one must say that
recently the non-residential construction sector has seen a strong lift in activity from and still to below trend
levels. You can form your own judgement from the above graph as to whether this will continue. We think
not.
Page 8
BNZ WEEKLY OVERVIEW
INTEREST RATES
Growth vs. Economic Slack
In a nutshell this is what drives inflation along with institutional arrangements, imported inflation, and exchange rate changes. If
you want to forecast monetary policy you need to monitor these things. So we will, adding stuff here when we learn it. The
current common view is rate tightening from September. Have we learnt anything this week which alters this outlook?
The growth indicators remain weak and unemployment will rise because of the earthquake and because
some employers will act on their dented confidence by putting hiring plans on hold. Thus the interaction of
demand and supply factors says inflation risks have dissipated and hence cutting interest rates this morning
was probably a very easy decision for the Reserve Bank to make. In essence the earthquake has allowed
them to reset monetary policy back at accommodative levels achieved during the global financial crisis and
they now start afresh in their consideration of when to take away the stimulus.
Other Inflation Influencers
Courtesy of the troubles in Libya oil prices have risen strongly in recent weeks and NZ petrol prices have hit
their highest levels since late-2008. In some countries such as France they have already reached record
levels – it al depends upon tax changes (we have extra GST and the Emissions Trading Scheme in place)
and exchange rate levels. The Kiwi dollar is above average against the greenback and that is restraining the
feed-through of higher oil prices.
High fuel prices will drive extra headline inflation but this is the sort of thing the Reserve Bank will look
through and only act on if they see large second-round effects. That is, prices and wages being raised to
compensate for this higher input costs. With the labour market still loose we think the ability of wage earners
to gain such compensation will be limited therefore do not believe the Reserve Bank will for now be all that
worried about the inflationary impact of the oil price rises. But they will monitor the situation closely and in
particular keep a close eye on inflation expectation measures.
Rate Movements This Week
Confirmation by the Reserve Bank of a 0.5% cut in the official in the official cash rate to 2.5% has seen 90day bank bill yields fall to 2.67% from 2.89% last week and 3.22% three weeks ago. One year swap rates
have fallen to near 2.77% from 2.91% last week and 3.38% three weeks ago. The five year swap rate has
fallen to 4.4% from 4.45% last week and 4.77% three weeks ago. These rate declines may be just about it
for this rally as we feel the Reserve Bank would be very reluctant to cut the cash rate again, especially as
figuring out what is really happening in the economy over the next few months will be quite difficult.
90 DAY BANK BILL YIELDS
ONE YEAR SWAP RATE
6.5
4.5
%
6
4.3
%
4.1
5.5
3.9
5
3.7
4.5
3.5
4
3.3
3.1
3.5
2.9
2011
2009
2.7
17-Jan
14-Feb
16-Dec
21-Oct
18-Nov
23-Sep
26-Aug
1-Jul
29-Jul
3-Jun
8-Apr
6-May
9-Mar
9-Feb
9-Dec
12-Jan
14-Oct
11-Nov
16-Sep
22-Jul
19-Aug
24-Jun
29-Apr
27-May
2-Mar
30-Mar
2-Jan
30-Jan
2.5
2.5
8/
1/
09
5/
2
5/
3
2/
4
30
/4
28
/5
25
/6
23
/7
20
/8
17
15 /9
/1
12 0
/1
10 1
/
7/ 12
1/
10
4/
2
4/
3
31
/3
29
/4
27
/5
24
/6
22
/7
19
/8
16
14 /9
/1
11 0
/1
1
9/
6/ 12
1/
11
3/
2
3/
3
2010
3
Page 9
BNZ WEEKLY OVERVIEW
FIVE YEAR SWAP RATE
6
%
5.5
5
4.5
4
2010
2009
8/
1/
09
5/
2
5/
3
2/
4
30
/4
28
/5
25
/6
23
/7
20
/8
17
15 /9
/1
12 0
/1
10 1
/
7/ 12
1/
10
4/
2
4/
3
31
/3
29
/4
27
/5
24
/6
22
/7
19
/8
16
14 /9
/1
11 0
/1
1
9/
6/ 12
1/
11
3/
2
3/
3
3.5
FINANCIAL MARKETS DATA
This
week
Official Cash Rate
2.50%
90-day bank bill
2.67%
1 year swap
2.77%
5 year swap
4.40%
180-day term depo
3.85%*
Five year term depo
6.00%
* 160 days = 5.2%
Week
ago
3.00
2.89
2.91
4.45
3.85
6.00
4 wks
ago
3.00
3.21
3.43
4.76
4.10
6.50
3 months
ago
3.00
3.20
3.47
4.79
4.10
6.50
Yr
ago
2.50
2.70
3.48
5.24
4.90
6.75
10 yr
average
5.9
6.2
6.3
6.6
6.0
6.5
If I Were a Borrower What Would I Do?
Stay floating BUT. There is a level of fixed interest rates at which I would sacrifice a four decade low floating
rate in order to lock in rate certainty. In addition there is a point when if fixing was my goal I would jump from
floating into fixed because fixed rates were about to rise. With regard to this latter point the following factors
are in play.
•
•
•
Global inflation is rising with increasing concerns that the US Federal Reserve is risking too much
inflation next year in order to try and underpin economic growth this year and the outcome will be a
1994-like selloff in medium to long term interest rate products in expectation of something approaching
the 3% rise in the Federal funds rate which happened back then.
The cut we have just seen here in New Zealand may mean extra rapid tightening next year once the
rebuilding of Christchurch hits full speed.
Global commodity prices are rising on the back not just of loose monetary policies but structurally higher
demand out of emerging economies. This means rapidly rising input costs in NZ with timber prices for
instance just increasing 25%.
I would float now and only fix two years at a rate 6.0% or better or three years at a rate 6.25% or better.
7.5
Columns = Forecast
average
floating rate cost
7
Current fixed rates
6.5
6
5.5
%
5
1
2
Years
3
Page 10
BNZ WEEKLY OVERVIEW
CURRENT VERSUS AVERAGE MORTGAGE INTEREST RATES
8.1
%
8.0
8.0
7.9
8.5
HOUSING TOTAL MONEY FLOATING RATE
11.5
%
Interpolated pre-2007
7.8
8.0
7.6
7.6
10.5
7.5
9.5
Current interest
rates
7.0
6.5
8.5
6.0
7.5
Average rates past eight years.
5.5
6.5
2000
1998
5.0
Total
Money
1 year
2 year
3 year
4 year
5 year
7 years
98
12/2 27/4 11/5 10/5
HOUSING 2 YEAR FIXED MORTGAGE RATE
10.5
2006
2004
2008
8/5
6/5
2/5
4/5
3/5
1/5
30/4 29/4
HOUSING 5 YEAR FIXED MORTGAGE RATE
10
%
10
2002
5.5
%
9.5
9.5
9
9
8.5
8.5
8
8
7.5
7.5
7
7
6.5
6.5
6
2000
1998
2002
2006
2004
6
2008
5.5
2000
1998
2002
2006
2004
2008
5.5
98
12/2 27/4 11/5 10/5
8/5
6/5
2/5
4/5
3/5
1/5
98
30/4 29/4
12/2 27/4 11/5 10/5
8/5
6/5
2/5
4/5
3/5
1/5
30/4 29/4
If I Were a Term Deposit Investor What Would I Do?
Make the best of the situation given that low interest rates will be here for at least all of this year and
possibly well into 2012. Then if they do jump up at some point in 2012 it will be because inflation is
accelerating and that means in real terms I may not be better off. The inflation element globally is very
uncertain at the moment with plenty of analysts predicting a major surge from a combination of continued
money printing n the United States, money printing in emerging countries to stop their currencies
appreciating against the USD, weather events pushing up food prices, underlying structural growth in
demand as well as speculative pressures plus events such as what is happening in Libya.
Still, with so much uncertainty around the world having a good stack of funds in what appear to be quite safe
term deposits feels good.
180 DAY TERM DEPOSIT
RATE
10.00
FIVE YEAR TERM DEPOSIT RATE
9.00
9.00
8.50
8.00
8.00
7.00
7.50
6.00
7.00
5.00
6.50
%
4.00
%
6.00
3.00
5.50
2.00
5.00
1.00
4.50
Source:BNZ
0.00
Source:BNZ
4.00
96
97
98
99
00
01
02
03
04
05
06
07
8
9
10
11
96
97
98
99
00
01
02
03
04
05
06
07
8
9
10
11
Page 11
BNZ WEEKLY OVERVIEW
HOUSING MARKET UPDATE
Turnover is weak, construction falling, and prices essentially flat on average.
Housing Shortage
A few weeks ago we discussed research by the Department of Building and Housing into the number of
dwellings needing to be built each year to handle population growth and we concluded that at the start of this
year there was a fundamental shortage of about 28,000 dwellings. Now we have an estimate that 10,000
houses in Christchurch may be torn down as a result of the latest earthquake. That means our starting point
now is a shortage of 38,000 dwellings. Actually it will be more than that because of the estimated 100,000
houses in Christchurch needing repairs many will be uninhabitable for quite some time.
This does not of course mean that all of a sudden house prices are going to surge as people will clearly
double up for a while, holiday homes and motels will be occupied and so on. But over the longer term as
reconstruction of houses is constrained by a shortage of resources there will be a price impact regardless of
what the various housing affordability measures are showing.
It pays to remember that affordability measures give no insight into where prices for houses are likely to go
on average. If they did then we would not see average prices deviate from what some measure deems to be
an affordable level. If deviation occurs and the extent of over or under valuation reaches for instance 10%
that does not imply prices will fall 10% or hold still while incomes change. It could be that the valuation
measure is on its way to being 20% away from trend, or 40%. So be careful when looking at any fair value
measures for not just houses but shares, exchange rates and so on. If they worked as it were in predicting
price movements deviations from mean would not occur in the first place.
Or looked at another way, have any of these valuation measures yielded useful forecasts of prices moving
further away from fair value in the first place? Anyway, at least they do allow international comparisons to be
made which are actually quite important for us Kiwis because we are so internationally mobile. On average
over the past ten years we have had 1.7% of our population leave the country per annum and a flow
equivalent to 2.1% arrive. Our population churns rapidly and that creates a housing market dynamic we must
always keep near the front of our minds. If net migration flows turn quickly to the downside because of the
earthquake then housing market pressure will be quickly relieved to some extent. We will get a feel for this
effect in coming months and the risk is the net inflow becomes very low especially because of the increasing
attractiveness of shifting to Australia.
This is an email we received this week relevant to building costs.
“You may want to factor this into your inflation/housing calculations. As a timber manufacturer who exports
95% of production we are now facing a 25% increase in the price we pay for logs from 1/4/11.(54% increase
on a year ago). The excuse given is that this is what China will pay. When the building industry does restart
again the cost of lumber may be a shock to many. This is of course if there are any timber manufacturers
left. We could however import the timber.”
Just for your guide, there is as yet no evidence that spiralling timber prices are causing a fall-off in timber
exports. Export receipts from timber exports were 7% higher in the three months to January compared with a
year earlier. The first graph shows the 12 month running total of timber exports. The second graph shows
that there is evidence of rising imports but this comes after an unusually weak period and the long term trend
is upward anyway. So one cannot yet run an argument that sharply rising log prices are causing a shift in NZ
timber movements from exports to imports. The thing to remember is that log input prices to the timber
process will be rising offshore as well as here, so substitution from domestic timber to imported timber is
unlikely to happen to any major degree.
Page 12
BNZ WEEKLY OVERVIEW
SAWN WOOD IMPORTS
SAWN WOOD EXPORTS
70,000,000.00
1,000,000,000.00
900,000,000.00
$ 12 months
$ 12 months
60,000,000.00
800,000,000.00
50,000,000.00
700,000,000.00
600,000,000.00
40,000,000.00
500,000,000.00
30,000,000.00
400,000,000.00
300,000,000.00
20,000,000.00
200,000,000.00
10,000,000.00
100,000,000.00
-
Source:Statistics
NZ
89 90 91 92 93 94 95 96 97 98 99
0
1
2
3
4
5
6
7
8
9
10 11
Source:Statistics
NZ
89 90 91 92 93 94 95 96 97 98 99
0
1
2
3
4
5
6
7
8
9
10 11
Are You Seeing Something We Are Not?
If so, email us at [email protected] with Housing Comment in the Subject line and let us know.
Key Forecasts
• Dwelling consent numbers to improve further out. House prices edging higher from second half of 2011.
Page 13
BNZ WEEKLY OVERVIEW
MAJOR OFFSHORE ISSUES
There are many important things happening offshore not easily covered in the one country commentaries we have traditionally
included when time permitted in the FX section below. So this new section will concentrate solely on developments in the
areas occupying the minds of the markets, policy makers and politicians around the world. In some weeks certain sections will
be empty because nothing new will have occurred.
European Debt
Southern Euro-zone governments have soaring debts and/or deficits due to taking on their private sector’s debts, or simply
their own fiscal incompetence. Concerned by these developments and the lack of suitable EU-wide institutions for handling
crises investors are demanding higher and higher interest rates before investing in more debt, causing debt servicing budget
blowouts for the recalcitrant borrowers. To try and keep investor confidence some governments are radically slashing
spending, raising taxes and restructuring but still borrowing costs climb and the citizenry grow increasingly restless. The logical
route is they restructure their debt but that can’t happen yet because the bulk of such debt is held by French and German
banks and the capital losses could send them bankrupt thus crushing their own economies. What happens then? Lots more
investor worries, more official bailout packages as already done for Ireland and Greece, more fiscal austerity and rioting, then
when bank capital bases are secure enough debt restructuring will almost certainly come for Ireland, Greece, Portugal and
maybe Italy and Spain.
What’s new?
Last week the ECB President Mr. Trichet said “An increase of interest rates in the next meeting is possible.”
Meaning that in April it is likely the ECB cash rate will be increased 0.25% to 1%, the first increase since July
2008 when the rate eventually peaked at 4.25%. The rate rise will prove problematic for highly indebted
countries like Ireland, Greece, Portugal and Spain which are struggling to manage their debt burdens while
enacting reforms aimed at getting (some) inefficiencies out of their economies – and at the same time trying
to badger the Germans into artificially lowering the interest rates they are being charged for their bailout
funds (Ireland and Greece only).
Speaking of Greece, this week the largely inevitable happened with Moody’s cutting their credit rating by
three notches to B1 from Ba1 citing default risk because of lax tax collection, the risk that reforms are not
implemented, and rising risk of losses to private investors because of German demands for such. The
premium investors now demand for holding Greek bonds has jumped to over 9% above German bond yields
which is the highest such spread since the second week of January.
Portugal is also having to pay more for its funds with a bond auction overnight poorly bid and yields at record
highs.
The prize for disappointing news of the week must surely go to European bank regulators who have decided
that the next round of bank stress tests will still not include a default event. That is they are not going to
require banks to model the impact on their balance sheets of the likes of Greece, Ireland, Portugal or Spain
defaulting on their debt. Their concern is that modeling a default will imply they expect one to happen.
Worse than that, regulators in individual countries will be able to use their own particular definitions for the
stress tests. The last time these stress tests were run all banks got pass marks and some then went on to
require bailouts. The results come out in June and it seems unlikely given the weak nature of the tests that
concerns about the financial soundness of banks in Europe will finally be laid to rest.
Still, in Germany economic growth prospects remain firm with industrial output rising by a strong 1.8% in
January.
Page 14
BNZ WEEKLY OVERVIEW
Chinese Inflation
In China high inflation tends to spur non-one party thoughts from the populace à la Tiananmen Square 1989 therefore the
leaders will do all they can to get food price rises in particular down. So is inflation easing, what measures will be added to get
inflation down? The big global worry is that these measures could produce a sharp slowing in growth which slams
sharemarkets, Chinese raw material demand and therefore commodity prices relevant especially for Australia and via them to
us, plus our own large dairy and forest product exports to China.
What’s new?
No time to fill this section this week.
US Growth Momentum
The US economy has grown 2.2% over the past year but the upturn is not yet “self-sustaining” or reducing unemployment
stuck near 9% at 14mn - worse than Germany, Japan, Britain and Russia. Manufacturing is firm but retailing, housing and
business investment remain weak while few moves have yet been started to rein in an unsustainable Federal Budget deficit
above 11% of GDP and concerns are growing about state and local budgets. What we’re looking for are signs that the
economy is firing on more cylinders than just those caused by a low USD, restocking, and fiscal stimuli. I.E. consumption,
housing, and business capital spending.
What’s new?
The monthly non-farm payrolls report came in about at expectations. There were 192,000 net new jobs
created in February and previous months’ gains were revised slightly higher to reach 63,000 from the
previous 32,000. The result is largely being interpreted in a positive light but realistically it still shows a
labour market only just getting onto its feet. Given that January was affected by snow storms which impacted
hiring and February recorded a bounce back from that effect it is best to average the two months to get a
feel for what is happening. Doing that one gets growth averaging 128,000 which is better than the average
for all of 2010 of 78,000 a month and in particular is better than the average for the last six months of 2010
which was just 47,000. So the result looks okay but is still well below the 300,000 level generally accepted
as needed in order to stop the stock of unemployed from rising.
US - NON-FARM PAYROLLS
12
600000
Unemployment rate
RHS
400000
10
200000
8
0
6
-200000
-400000
4
-600000
2
-800000
Source: US Dept. of Labour
Monthly jobs growth LHS
-1000000
0
06
07
8
9
10
11
The unemployment rate actually fell to 8.9% from 9% in January and a peak of 10.1% in October 2009. But
this fall reflects people leaving the workforce probably disappointed at their prospects of finding a job.
Still overall the result is okay and allows one to hope that hits which will come this year from states and local
authorities struggling to manage their finances and oil prices rising will by offset enough to allow consumer
spending to record improving growth.
Page 15
BNZ WEEKLY OVERVIEW
Global Currency Conflict
Asian economies have driven growth for many years by keeping their currencies low against the greenback (thus hurting the
purchasing power of their consumers). But their model of growth relying on excess spending by US households is shattered
yet they either don’t realize it or can’t face the adjustment pain. Natural pressures on the greenback are now downward
(budget and current account deficits, debt risk, relative interest rates and share of world economic activity and growth) but to
stop their currencies appreciating versus the USD Asian economies are keeping their interest rates low and printing more
money thus running rising inflation risks. Recent and planned extra US bond buying is adding to rising economic/political/trade
tensions. We are watching for either Asian currency capitulation (most closely watched are the Chinese), further capital inflow
restrictions, deployment of trade weapons, etc. The big risk is a global currency/trade war.
What’s new?
This issue is off the radar now for now because emerging economies which were taking steps to keep their
currencies low can now more obviously see the benefits of letting them rise as a means of suppressing
inflation and food price inflation in particular.
Commodity Prices
Prices of commodities are soaring on the back of currently firm Asian growth, expected rising structural demand related to
infrastructure and rising incomes, and surging speculative investor buying driven by US money printing, inflation fears, ultralow interest rates, and wariness of alternative investments. Bubbles are undoubtedly developing but history shows we have
zero chance of picking when they peak and where.
The main commodity price news for the week came in the oil market with the price in USDs per barrel for
West Texas Intermediate rising to almost $105 from $98 just over a week ago and $85 three weeks ago.
While there are promises by OPEC members to boost production in order to offset the loss of Libya’s output
(about 2% of all oil produced) the sheer uncertainty about how long Libya will be out of the market and what
happens in other Middle East oil producing countries suggests oil prices will remain elevated for some time
yet.
OIL - West texas Intermediate
110
US$
100
90
80
70
60
50
40
2010
2009
2011
17-Jan
14-Feb
16-Dec
21-Oct
18-Nov
23-Sep
26-Aug
1-Jul
29-Jul
3-Jun
8-Apr
6-May
9-Mar
9-Feb
9-Dec
12-Jan
14-Oct
11-Nov
16-Sep
22-Jul
19-Aug
24-Jun
29-Apr
27-May
2-Mar
30-Mar
2-Jan
30-Jan
30
Australian Growth
Australia delivers 24% of our merchandise export receipts, 45% of our tourists, owns almost all our banking sector and 51% of
FDI, contains over 500,000 Kiwis and acts as a back-up labour market for most of us. What happens there matters to us so we
shall monitor their growth here. The Aussie economy is growing strongly on a mining and infrastructure boom bringing us
competitiveness advantages in tourism and manufacturing as the AUD soars but will drain our skilled labour base. There is an
opportunity to entice manufacturers here. Jobs growth is averaging over 30,000 a month and at what point does this do four
things – spur currently weak retail spending, spur appallingly low house construction, drive wage inflation, and spur higher
non-mining business investment to boost productivity. The first three feed-throughs will accelerate monetary policy tightening
and lower the NZD/AUD exchange rate further. If job growth accelerates migration outflows from NZ to Australia will soar even
more than seems certain over 2011-12.
What’s new?
The NAB monthly business sentiment survey recorded a rise in February to a net 14% of respondents
feeling positive from 5% in January. This is the highest confidence level since March last year but a key
difference is that business feelings about current trading conditions remain weak at a net 3% pessimistic
from 15% optimistic in March last year. Effectively what this comparison of numbers shows is what our own
Page 16
BNZ WEEKLY OVERVIEW
BNZ Confidence Survey has been picking up since the middle of last year (apart from this month).
Businesses have been feeling positive about things down the track but have noted in their comments that
current conditions remained very very tough.
AUSTRALIA - BUSINESS CONFIDENCE
30
AUSTRALIA - EMPLOYMENT INTENTIONS
20
s.a. net % positive
s.a. net % positive
15
20
10
5
10
0
0
-5
-10
-10
-15
-20
-20
-25
-30
Source : NAB
Source : NAB
-30
-40
-35
0
1
2
3
4
5
6
7
8
9
10
11
0
1
2
3
4
5
6
7
8
9
10
11
A net 2% of businesses plan hiring more people which is only a small improvement from net 0% in January
when worries were high regarding the floods in Queensland.
But at the same time as business sentiment has improved consumers have become more cautious. The
Westpac Melbourne Institute consumer sentiment reading eased slightly to 104.1 in March from 106.6 in
February. This is the lowest reading since June last year but as it is still above the neutral level of 100
suggests mild though very unspectacular growth in household spending.
AUSTRALIA - CONSUMER CONFIDENCE
AUSTRALIA - DWELLING FINANCE APPROVALS
135
40
8.0
Index. 100 = neutral
Monthly
LHS
6.0
125
4.0
115
30
20
2.0
10
0.0
105
0
-2.0
95
-10
-4.0
-6.0
-8.0
Source: Westpac Melbourne Institute
75
Source: ABS
-10.0
3
4
5
6
7
8
9
10
11
7
A
J
O
-20
3 months on year ago
%
RHS
85
8
A
J
O
9
A
J
O
-30
-40
10
A
J
O
11
And speaking of unspectacular, the seasonally adjusted number of housing finance approvals in January fell
by 4.5% or 6.5% if one excludes refinancing of existing loans. Like many other housing indicators the result
shows residential construction still remains weak in Australia though activity is picked to improve soon on the
back of rebuilding in Queensland following the floods.
Page 17
BNZ WEEKLY OVERVIEW
Exchange Rates
Exchange
This
Week
4 wks
3 mths
Yr
Consensus 10 yr
Rates
Week
Ago
ago
ago
ago
Frcsts yr ago* average
NZD/USD
0.736
0.743
0.771
0.749
0.702
0.690
0.629
NZD/AUD
0.728
0.732
0.763
0.761
0.769
0.772
0.855
NZD/JPY
60.900
60.800
63.500
62.710
63.2
66.999
68.4
NZD/GBP
0.454
0.455
0.479
0.475
0.468
0.426
0.368
NZD/EUR
0.529
0.536
0.562
0.566
0.516
0.495
0.511
NZDCNY
4.837
4.883
5.080
4.990
4.792
4.83
USD/JPY
82.745
81.830
82.361
83.736
90.028
97.100
109.9
USD/GBP
1.621
1.633
1.610
1.577
1.500
1.620
1.705
USD/EUR
1.391
1.386
1.372
1.324
1.360
1.394
1.229
AUD/USD
1.01
1.02
1.01
0.98
0.91
0.894
0.737
*Sourced from Consensus Economics. http://www.consensuseconomics.com/
Kiwi Dollar Down Further
In anticipation of and then with confirmation of a 0.5% cut in the official cash rate this morning the NZ dollar
has declined over the week against most currencies to end near US 73.6 cents from 74.3 a week ago and
75.4 three weeks ago. Against the Australian dollar we are still close to 73 cents while against the pound we
are unchanged near 45.5 pence.
NEW ZEALAND DOLLAR vs USD
NEW ZEALAND DOLLAR vs AUSTRALIAN DOLLAR
0.85
0.88
0.8
0.86
0.75
0.84
0.7
0.82
0.78
0.55
0.76
0.5
0.74
0.45
0.72
0.4
0.7
2-Jan
30-Jan
2-Mar
30-Mar
29-Apr
27-May
24-Jun
22-Jul
19-Aug
16-Sep
14-Oct
11-Nov
9-Dec
12-Jan
9-Feb
9-Mar
8-Apr
6-May
3-Jun
1-Jul
29-Jul
26-Aug
23-Sep
21-Oct
18-Nov
16-Dec
17-Jan
14-Feb
0.8
0.6
2-Jan
30-Jan
2-Mar
30-Mar
29-Apr
27-May
24-Jun
22-Jul
19-Aug
16-Sep
14-Oct
11-Nov
9-Dec
12-Jan
9-Feb
9-Mar
8-Apr
6-May
3-Jun
1-Jul
29-Jul
26-Aug
23-Sep
21-Oct
18-Nov
16-Dec
17-Jan
14-Feb
0.65
NZD vs BRITISH POUND
NZD vs EURO
0.49
0.59
0.47
0.56
0.45
0.53
0.43
0.5
0.41
0.47
0.39
0.41
0.33
0.38
2-Jan
30-Jan
2-Mar
30-Mar
29-Apr
27-May
24-Jun
22-Jul
19-Aug
16-Sep
14-Oct
11-Nov
9-Dec
12-Jan
9-Feb
9-Mar
8-Apr
6-May
3-Jun
1-Jul
29-Jul
26-Aug
23-Sep
21-Oct
18-Nov
16-Dec
17-Jan
14-Feb
0.35
2-Jan
30-Jan
2-Mar
30-Mar
29-Apr
27-May
24-Jun
22-Jul
19-Aug
16-Sep
14-Oct
11-Nov
9-Dec
12-Jan
9-Feb
9-Mar
8-Apr
6-May
3-Jun
1-Jul
29-Jul
26-Aug
23-Sep
21-Oct
18-Nov
16-Dec
17-Jan
14-Feb
0.44
0.37
Offshore most attention has been on rising expectations of tightening monetary policy in Europe and to a
lesser extent the UK but at the end of it all exchange rates are still within recent trading ranges for the major
currencies though the euro and pound are pushing up against the greenback.
This publication has been provided for general information only. Although every effort has been made to ensure this publication is accurate the
contents should not be relied upon or used as a basis for entering into any products described in this publication. BNZ strongly recommends
that readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither the
Bank of New Zealand nor any person involved in this publication accepts any liability for any loss or damage whatsoever that may directly or
indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.
Page 18
BNZ WEEKLY OVERVIEW
ECONOMIC DATA
All %
Latest
qtr only
Inflation
RBNZ target is 1% - 3% on average
2.3%
GDP growth
Average past 10 years = 2.6%
-0.2
Unemployment rate Average past 10 years = 4.8%
6.8
Jobs growth
Average past 10 years = 1.9%
-0.5
Current a/c deficit
Average past 10 years = 5.5% of GDP
3.1
Terms of Trade
0.6
Wages Growth
Stats NZ analytical series
0.4
Retail Sales ex-auto Average past 9 years = 3.9%.
0.0
House Prices
REINZ Stratified Index
-0.0
Net migration gain
Av. gain past 10 years = 13,900
+10,451
Tourism – an. av grth 10 year average growth = 3.2%. Stats NZ
2.8
Consumer Conf.
Neutral = 100 Westpac McDermott
108.3
Miller
Latest
year rate
Business confidence BNZ survey
22
Household debt
10 year average growth = 10.3%. RBNZ
1.5
Dwelling sales
10 year average growth = 2.5%. REINZ
-11.3
Floating Mort. Rate (TotalMoney) 10 year average = 7.9%*
6.09
3 yr fixed hsg rate
10 year average = 7.8%
6.99
Previous
qtr only
1.2
0.1
6.6
1.1
3.0
3.0
0.8
0.0
-1.1
13,914yr
3.9
114.1
Prev mth
year rate
18
1.6
-11.3
6.09
7.15
Latest
year
4.0
+1.4
......
1.3
......
12.2
2.7
0.6
-2.3
......
2.8
6 mths
ago
-1.4
2.5
-26.7
6.09
7.15
Year
ago
2.0
-2.5
7.0
-2.4
3.2
-8.2
5.4
2.2
6.0
22,253
-0.0
116.9
Year
ago
36.8
2.9
-1.1
5.59
7.95
2 Yrs
ago
3.4
1.5
4.6
1.0
8.6
1.8
5.0
-3.7
-7.9
3,814
-0.3
101.3
2 yrs
ago
-14.7
3.9
-28.5
6.49
5.99
All actual data excluding interest & exchange rates sourced from Statistics NZ.
The BNZ Weekly Overview is prepared by Tony Alexander, Chief Economist at the Bank of New Zealand. Ph 04 4746744.
*extrapolated back in time as TotalMoney started in 2007
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