DM Asia-Pac: Australia and New Zealand

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[Twitter: EMgist latest]

  • Strategy:​

    • AUD

      • Strategic long AUD-NZD (5 Mar-18): Last week, poor Q4 capex data (-0.2% qoq vs consensus/prior 1.0%) dealt a blow to the AUD, though it ended the week relatively stable vs the NZD. In year-on-year terms, capex momentum is still strong (+4%) - lifted by manufacturing (+10.7%) and other capex (+10.3%) but dragged by mining slow recovery (-8.4%). The RBA's tone is unlikely to change this week, so an important driver of AUD outperformance could be data on inflation, retails, GDP and trade - as well as any credit or investment growth target-related news from China's National People's Congress. ​

      • Strategic long AUD-NZD (26 Feb-18): Last week's Australian wage growth were better-than-expected but it was not enough (yet) to significantly move the needle on the RBA expectations. The cross is more likely to be dictated by NZ data this week.


  • Macro:

    • Week ahead (5 Mar-18): In Antipodean markets, the main event is the RBA MPC (Tue), which is likely to reiterate a lack of urgency to tighten monetary policy in the near-term. In economic data, Australia sees the Melbourne Institute's monthly CPI, building approvals and job adverts (Mon), current account and retail sales (Tue), construction index and GDP (Wed), trade balance (Thu). Consensus expects GDP to decelerate in Q4 from 2.8% to 2.5% due to lower net exports and weak capex, though partly offset by consumption buoyed by job growth (proxy: car sales is up 3.3% yoy vs 0.8% in Q3). In New Zealand, there is QV house price index (Wed), manufacturing activity (Thu), card spending (Fri). ​​

      • Economic momentum is now above-average and accelerating for most Australian states - a significant improvement from six months ago​

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  • Growth

    • Property market - Prices peaking: ​Macropru measures and higher mortgage lending rates have helped to slow home px growth.

      • Latest:

        • 16 Apr-18 (Bloomberg): Australia’s Lending Rules Are About to Batter Home Buyers. Borrowing firepower may be slashed up to 35%, UBS analysts say. Mortgage crackdown set to drag on property as boom tails off

        • "Conditions in the established housing market had eased in all major cities, but had remained relatively strong in Melbourne. Growth in rents had been subdued. Housing credit growth had eased a little, although it remained faster than household income growth." - RBA minutes (released 21 Nov-17)

        • Surge in apartments recently completed and under construction in major cities raises the risk of price falls - RBA Kearns (20 Nov-17)

        • Sydney house prices slipped 0.1% in September, first monthly decline after 17 gains, suggesting macro-pru measures are working

        • Median Sydney house px -1.9% in 3Q17 in first drop since 2015 as banks charge higher rates - AFR citing Domain Group (11 Oct-17)

  • Monetary policy - Next RBA hike seen in 2H18: RBA Gov. Lowe want to see economic growth speed up and job market spare capacity decline before signalling a hike. Lowe has made clear he is less likely to follow global central banks in recent tightening as RBA neither cut rates aggressively nor pursued QE. Growth/CPI forecast changes from the Monetary Policy Statement published a few days later may be more revealing.

    • Recent news:

      • RBA MPC (6 Mar-18): ​RBA firmly on hold, keeps its neutral stance. Inflation likely to remain low for some time but RBA expects inflation to pick up as economy strengthens. Swaps market saw no major changes to projections for the first hike. December chance sits at 63%. Focus now turns to GDP data.

    • Statements: 

      • RBA minutes (19 Jun-18): ​

        • Highlights: 

          • Early indications for 2Q growth suggest business conditions at post-2008 high, though tempered by weak consumption, minutes of Reserve Bank of Australia’s June policy meeting showed Tuesday

          • Central bank expected 1Q growth of at least 2.75% at meeting, held a day before release of GDP data that showed 3.1% annual expansion

          • RBA says infrastructure investment is likely to continue to support growth for “some time”

          • Wage pressures building in U.S. and Japan were expected to lead to a lift in inflation

          • Outlook for consumption growth continued to be “a source of uncertainty” as income growth was slow and debt high

          • RBA sees more evidence of firms having difficulty hiring workers with right skills and wage pressures building in some parts of the economy​

        • “Forward-looking indicators of labor demand had continued to point to employment growth increasing to above-average rates in coming months”

        • “The ratio of job vacancies to the number of unemployed workers had remained well below levels seen a decade earlier”, signaling “spare capacity in the labor market”

        • Strong population growth and projections for the age structure “would make Australia one of the youngest populations” among advanced economies

        • “Inflation remained low and was likely to remain so for some time, reflecting slow growth in labor costs and strong competition in the retail sector”​

    • Growth outlook - Uncertainty from consumption, upside from investment: RBA growth forecast was left largely unchanged (7 Nov-17).

      • Jobs market - Tight labor market not translating to wage growth, in turn inflation pressure: Labor market tightness has yet to drive higher wages and inflation.

        • "Members noted, however, that there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure. In particular, they noted that, among other factors, pressure on margins from strong competition and a faster-than-expected pick-up in productivity growth could delay the pass-through of tighter labour market conditions to inflationary pressure" - RBA minutes (released 21 Nov-17)

        • Concerned under-employment is not improving much - RBA Harper (11 Oct-17)​

      • Consumption - Weaker retails reflect low wage growth and stretched household balance sheets: RBA is concerned that record-high household debt and stagnant wages will prompt consumers to pull back on spending (consumption = 55% of economy). Retail sales (Oct-17) posted its weakest 3mth-stretch in seven years.

        • “One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.” - RBA Lowe (7 Nov-17 MPC)​​

      • Investment - Upside from non-mining sector:

        • "... the outlook for growth in the Australian economy was largely unchanged from three months previously. GDP growth was expected to increase and average around 3 per cent over the next few years as the drag from mining investment diminished and export growth continued. Growth in both public investment and non-mining business investment was still expected to pick up. [...] Dwelling construction was likely to remain high over the following year or so, given the large pipeline of work, but it was not expected to add further to growth." - RBA minutes (released 21 Nov-17)

        • “The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time.” - RBA Lowe (7 Nov-17 MPC)​

        • "Over recent months there have been more consistent signs that non-mining business investment is picking up. A consolidation of this trend would be a welcome development." (3 Oct-17 MPC statement)

    • Reference:

      • Current rate: 1.5%​

      • Core CPI target: 2-3%. Core CPI defined as the average of the Trimmed Mean CPI and Weighted Median CPI.

      • RBA forecasts (as of 7 Nov-17):

        • GDP 2.3% 2017f, 3.0% 2018f, 3.3% 2019f

        • CPI 2% 2017f, 2.3% 2018f, 2.5% 2019f

      • RBA links: [Home] [Minutes - Past and Latest] [Inflation Target]

      • People:

        • Governor Philip Lowe

        • Other: Debelle, Harper

  • Fiscal policy

    • Budget FY18-19:

      • Commentary: ​

        • 8 May-18 (Bloomberg)​: Winners and Losers in Australia’s 2018 Budget

    • Commentary: ​

      • 5 May-18 (Bloomberg): Australia’s Prime Minister Malcolm Turnbull has an opportunity to restore a fiscal surplus earlier than promised. Instead, the government budget may remain in deficit for another year, following an estimated shortfall of 0.3% of GDP for calendar 2017.

        • The budget for the new fiscal year starting in July is expected to include tax cuts for households and businesses, along with a substantial increase in infrastructure spending.

        • Treasurer Scott Morrison said there will be "targeted" and "measured" tax cuts for middle to lower income earners.
          Prior plans to increase the national health levy by 0.5% have been scrapped, thanks to strong employment growth and higher commodity prices that have lifted government revenues.

        • Ongoing fiscal support would benefit households (saddled with debt and stagnant wages) and the government (which faces elections).

        • An increase in the deficit-to-GDP ratio would be risky. S&P Global Ratings this year reaffirmed its negative outlook on Australia’s AAA credit rating, doubting the government’s ability to return the budget position to surplus by 2020.

        • The steady withdrawal of fiscal stimulus has not been enough to stem a sharp increase in government debt relative to the size of Australia’s economy.​

  • Domestic politics - Joyce by-election distracts from govt fiscal agenda, could risk Turnbull majority: In the aftermath of the dual citizenship scandal - and the worst case scenario of Deputy PM Barnaby Joyce losing his high court citizenship case - the Turnbull govt is likely to face inquiries over validity. The 16 Dec special by-election in Deputy PM Joyce's Sydney district of Bennelong is distracting from the govt's tax cut effort. The Turnbull govt is at risk of losing its one-seat parliamentary majority upon a Joyce loss. A recent poll (20 Nov-17) shows Joyce running neck and neck vs Labor Party.


Twitter: [New Zealand]


  • Strategy: ​

    • NZD - Strategic long vs AUD or USD: A lot of negativity wrt political risk and a prospective change in RBNZ mandate is priced in. Adding an employment mandate - in addition to inflation targeting - makes the RBNZ look more like the Fed. Good jobs data of late actually implies tighter - not looser - monetary policy.​

  • Macro:

    • Week ahead (12 Mar-18): In Antipodean markets, the key event is New Zealand GDP (Thu). Consensus expects Q4 GDP to accelerate to 3.2% from 2.7% yoy. However, because this is likely to have been lifted primarily by exports - and less by domestic demand as business confidence keeps investment low (1%) - Q4 GDP is unlikely to bring forward RBNZ rate hikes (consensus expects a hike only in 1H19, with risks of a delay). This week, New Zealand also sees current account (Wed) and PMI manufacturing (Fri). ​


  • Growth - Improving with upside risk: Set to improve from 2.6% (Bloomberg cons 2017f) to 3.0% (2018f)​, with upside risk. Growth prospects are led by exports (3.6% with upside risk), investment (4.2%) and dragged somewhat by household consumption (2.9%, some downside risk), govt spending (2.5% with upside risk) and imports (4.4% with upside risk).

    • Job market - Surprised strong in Q3: Full-time employment 2.2% qoq > consensus 0.8%. Jobless rate 4.6% < consensus 4.7% and lowest since 4Q08. Partipation of 71.1% > consensus 70.2%.​

    • Property market - Already softening: Home sales -26.2% yoy in Sep-17 (Aug-17 -20%) according to REINZ. The Reserve Bank of New Zealand tightened lending rules for mortgages in November 2015 and again in October 2016 to shore up financial stability. Funding constraints from slow deposit growth has also made banks more selective in lending.

  • Monetary policy - Dual-mandate RBNZ could coincide with stronger domestic growth: Slower inflation, along with an ongoing decline in inflation expectations and weaker signals for growth, adds to reasons the Reserve Bank of New Zealand may postpone plans for a rate increase -- currently signaled in mid-2019. Even so, any adjustment in the central bank’s signaling may have to wait for the incoming governor, Adrian Orr, to take the helm on March 27. The new government also plans to change the RBNZ’s mandate and decision-making structure. The mandate is to be broadened to include full employment as well as inflation. Decision-making by committee is also expected, instead of policy-setting by the governor alone.

    • The govt has confirmed (7 Nov-17) that it is considering a dual mandate for the RBNZ to target full employment alongside price stability. RBNZ currently operates a flexible CPI-targeting framework. RBNZ's benchmark rate is at 1.75%, a record low. OIS markets are pricing in a rate hike in 2H18, with upside risk if higher growth expectations materialize.

    • Review of the Reserve Bank Act is expected to be conducted in two stages - with the first focusing on a new dual mandate and a committee decision-making model for the central bank, including possible changes to the RBNZ board. Prior to the 23 Sep election, PM Ardern's Labour Party said it wanted monetary policy to be decided by a committee that includes external members, rather than the governor as lone decision maker. The second phase will draw up a list of other areas where “further investigations of the bank’s activities may be desirable” (eg five-yearly review of macro-prudential policy) according to FinMin Grant Robertson (8 Nov-17). Robertson said that the review would neither impact RBNZ independence nor the current 1-3% CPI target. However, under the proposal the RBNZ may not have hiked rates in 2014. Robertson also clarified that the RBNZ review is not expected to include an exchange rate target although the govt would like monetary policy to support an export-led economy.

    • Reference: 

      • Personnel: Acting Governor Grant Spencer (steps down in late March)​

        • Next Governor: Adrian Orr ​

          • How a Teenage Motel Worker Grew Up to Be New Zealand's Central Bank Chief (Bloomberg​, 20 Mar-18)

      • RBNZ forecasts (as of 8 Nov-17): ​

        • CPI: 1.7% (2017f), 2.0% (2018f)​

        • GDP: 3.0% (2017f), 2.9% (2018f)

        • CPI target: 1-3%

  • BOP:

    • Exports

      • Avg price for whole milk powder -2.7% to $3,037/ton from $3,122 at previous auction - Fonterra GlobalDairyTrade auction (3 Oct-17) 

  • FX policy - Weak-currency desired:

    • Ref: ​

      • New Zealand FinMin Robertson said "not especially" concerned re NZD drop <70 US cents, calling volatility normal after change of govt (30 Oct-17)​

      • If you are export-dependent why would you persist with an inflated NZD when even the IMF says its over-valued? - New Zealand First's Peters (10 Oct-17)

  • Domestic politics: After a close election, Labour Party beat the National Party led by Bill English to form a govt for the first time in 9yrs after winning the backing of nationalist party New Zealand First to form a coalition govt. NZD plunged 1.3% on the announcement (18 Oct-17). Labour PM Jacinda Ardern has appointed New Zealand First's Winston Peters as Deputy.

    • New govt agenda/announcements:​

      • Foreign property speculators will no longer able to buy houses in NZ from early next year​ - PM Ardern (30 Oct)

      • Minimum wage hikes

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