Transcript
Australia & NZ weekly
Week beginning 14 June 2010
Australia: consumer optimism fades. RBA focus: June meeting minutes and Battellino speech this week. Australian data focus: short week with WBC–MI Leading Index, housing starts & motor vehicle sales. NZ data: REINZ house sales & prices, consumer confidence & retail sales previewed. US data focus: import prices, NY & Philly Fed surveys, PPI, CPI, housing starts & permits, industrial production & current account due. US Fedspeak: Bernanke & Plosser giving speeches. Key economic & financial forecasts.
Information contained in this report was current as at 11 June 2010
Economic Research Sydney +61 2 8254 8720
[email protected] New Zealand +64 4 470 8255 London +44 20 7621 7061
Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac's financial services guide can be obtained by calling 132 032, visiting www. westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to economics@ westpac.com.au or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. © 2010 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.
Westpac weekly
Consumer optimism fades
The June Westpac–Melbourne Institute Consumer Sentiment Survey released this week shows a marked shift in the consumer. The widespread optimism apparent at the start of the year has evaporated, giving way to a much more sombre mood. The headline Index has fallen 15% since January and by over 12% in the last two months alone. While at 101.9, it remains in slight positive territory overall – a reading over 100 indicates that optimists still outnumber pessimists – the momentum is all one way. These sorts of shifts should not be ignored. Consumer sentiment has provided critical early warning signs in the past. Most recently, it was the first indicator to show a decisive weakening in 2008, with a 20% slump in the Index early in the year followed by an abrupt slowdown in spending (after rising 5.3% in 2007, consumption growth basically stalled flat in 2008). Of course, the backdrop was somewhat bleaker back then – mortgage rates had been pushed to an eye-watering 9.35% with core inflation running at an alarming 4%+ rate, petrol prices surging through $1.40/litre and the global financial crisis worsening with the Fed-brokered rescue of Bear Stearns. The starting point for sentiment was also lower with the larger decline taking the Index to levels only seen in the past during Australian recessions. Rather than a 2008-style collapse, the decline in sentiment in recent months has been more of a cooling-off from previous highs. It bears more resemblance in both magnitude and level terms to the weakening in sentiment in early 2005 – a decline that was followed by a moderation in consumption growth from above average (4.3%yr in 2004) to slightly below average (2.9%yr in 2005). There is more to the comparison with 2005. In both cases the initial trigger was an interest rate rise that took mortgage rates over the key threshold rate of 7¼%. For consumers, this seems to be the point at which rates start to 'bite' with a more pronounced negative reaction in sentiment to rate rises. That said, 7¼% seems to be the point where rates 'bite' but not necessarily where they really 'hurt'. Over the last tightening cycle, sentiment usually staged a partial rebound the month after a ratehike-induced fall. Indeed, what makes the June drop in sentiment interesting is that it followed a decision by the RBA to leave rates on hold. Other factors are clearly at play. Instead of rate concerns, the fall in June seems to reflect a mixture of concerns about deteriorating conditions abroad, financial market turmoil and uncertainty around the Government’s proposed Resource Super Profits Tax. We know this from responses to additional questions included in the March, June, September and December surveys. These cover whether respondents can recall news items on a range of subjects and whether these were viewed favourably or unfavourably. The most recalled items usually relate to interest rates and domestic and international economic conditions. In June though, the most recalled items related to the categories: 'Budget and tax' (55% recalled these items, the highest proportion since the GST introduction); 'Economic conditions' (48%); 'Interest rates' (34% down from 44% in March); and 'International conditions' (32% recall, the highest since the Asian crisis in 1997-98 and eclipsing readings registered during the global financial crisis). In every case the news heard was viewed as more unfavourable in June than it was in March. Reasons for concerns with the global economy are best exemplified by the 6.2% fall in the sharemarket and the 7½c fall in the AUD since the last survey – both following substantial declines over the previous month. It isn't possible to tell how much of the decline in the Consumer Sentiment Index is due to these different issues. However, there are some clues from the components of the Index. The dominant mover was how respondents assess their personal finances relative to a year ago which fell by 17.7% – the biggest fall since 2005 when petrol prices soared in the wake of Hurricane Katrina. This suggests the main negative came from an actual hit to finances, i.e. higher interest rates and declining share prices, than from the threatened hit from other factors. Notably, though this component index is well below its long run average, it is still well above the lows printed during the global financial crisis in 2008 and the early 90's recession. Movements in other components were more subdued. Expectations for ‘economic conditions over the next 5 years’ dropped 9%, swinging from a small positive to a small negative, and expectations for ‘family finances over the next 12 months’ fell 4.2%. These components are most likely to be capturing sentiment on economic conditions, global growth prospects and tax issues but also the outlook for interest rates. On rates, an additional question on expectations for mortgage interest rates shows that although consumers are less hawkish than they were in February, over 90% still expect more rate rises in the year ahead. What does this all mean for consumer demand? Clearly a more downbeat consumer is bad news for retailers, but it may not be as bad as the headline suggests. Although sentiment surged to historic highs last year, consumers never followed through in terms of actual spending, which has remained lacklustre over the last nine months. As such, there may also be less of a moderation. This seems to be the message from the component Index on whether now is a ‘good time to buy a major household item’. This Index, which has been shown to have the closest correlation to actual spending, never rose as high as headline sentiment in 2009 and has not fallen back as far over the last two months (–5.6% vs the 12% fall in the headline index). A US Fed chairman from the 1960s once famously said a central bank's job is “to take away the punch bowl just as the party gets going.” The RBA, it would seem, has taken it away before consumers had barely had a drink. Matthew Hassan, Senior Economist
Consumer Sentiment
30 20 10 0 -10 -20 -30 -40 -50 -60 -70 Jun-90
'time to buy a major household item' consumer sentiment
index
index
30 20 10 0 -10 -20 -30 -40 -50 -60 -70
*deviation from long run average
Sources: Westpac Economics, Melbourne Institute
Jun-95
Jun-00
Jun-05
Jun-10
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
2
Westpac Weekly
Data wrap
May ANZ job ads • Newspaper job ads fell 6.5% in May. This fall was sufficient to halt an eight month uptrend in newspaper ads, with the trend now in decline since February. However, the weakness in newspaper ads was more than offset by a 5.0% rise in internet ads. Consequently, combined total job ads rose 4.3% in May after a 1.2% fall previously, maintaining their uptrend for the 10th consecutive month with trend growth in May at +2.2%mth and +23.8%yr (vs +3.0%mth and +14.9%yr prev). With ads a flow variable and employment a stock, we use trends in the level of total job ads as a guide for future jobs growth momentum. We compare that level of trend job ads to a longer run trend (2½ year moving average), expressed as a % deviation from that longer run trend, which historically has provided a seven month lead for annual jobs growth. This detrended measure of job ads improved further to –13.4% in May from –16.7% in April and a much weaker –42.9% low in July 2009. Having troughed much earlier and more resiliently that job ads had implied in July 2009 at –0.1%yr, employment growth has subsequently accelerated rapidly to +2.2%yr in April 2010. With the continued improvement in our detrended measure of job ads, it continues to signal an ongoing acceleration in annual jobs growth. Indeed, our projected detrended job ads measure is suggesting that acceleration can continue through 2010/11. We retain our forecast for jobs growth to accelerate to 3%yr through 2010, and remain strong through 2011H1 at around 2.9%yr.
It likely reflects a mixture of concerns about deteriorating conditions abroad, financial market turmoil, and uncertainty over the proposed Resource Super Profits Tax. Responses on recalled news items supports this conclusion.
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Reasons for concerns with the global economy can be best exemplified by the 6.2% fall in the sharemarket and 7½ cent fall in the AUD since the last survey.
Apr housing finance • Housing finance to owner-occupiers weakened in April, falling by 1.8%. The reduction of stimulus is understandably dampening demand for finance. The RBA began normalising interest rates in October and the additional bonus under the Federal Government's First Home Buyer (FHB) scheme was phased out between October and December. The impact on the owner-occupier segment is material and is an argument for the RBA shifting to a "pause" - at least until the next inflation update. Finance approval numbers to owneroccupier are now down 26% in seven months. The risks for the near-term are skewed to the downside. Although, it was notable that new lending (ie ex-refinancing) was broadly flat in April, down just 0.5%.
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May NAB business survey •
Business confidence was the big mover in the month, declining to a still positive reading of 4.6pts from 12.5pts in April. This, the softest read since last June, is now a little below the long run average (of +7pts). It would appear that the announcement of the resource rent tax was a major factor, with mining sector confidence plunging by 30pts to a reading of +4pts. The survey also reported that confidence fell in wholesale and in manufacturing. Business conditions eased by 2pts to 6pts, a reading that is broadly consistent with 4% annual demand growth. Of the three sub-indices, trading and employment conditions were broadly unchanged. However, profitability was weaker. By industry: conditions in mining and construction were up strongly, but recreation, finance and wholesale were down sharply. Business conditions are strongest in mining, construction and transport, and weakest in retail.
The weak aspect was finance for the construction of new dwellings. Lending to owner-occupiers for this fell 4.8% in the month, to be down 30% over the last six months, while lending to investors for construction appears to be going broadly sideways. This suggests that while housing construction will experience an upswing over the second half of 2010 and into early 2011, given the existing strong pipeline of work, prospects are for a moderation in activity to emerge during 2011. The major strength in the report is further confirmation that the housing cycle is evolving, as is to be expected. While owner-occupier finance retreats from historic highs, investors are returning to the market in greater numbers. Investor finance rose 1.8% in April, to be up 39% since the start of 2009. At this stage the focus for investors appears to be more in the established market than in developing new housing projects. The greatest adjustment, in the upswing and now in the downswing, has been in the FHB market. Finance approval numbers to FHBs were broadly flat in the month to be down 58% since May and 15% below the August 2008 low. Upgraders have been impacted by the heat coming out of the FHB market and rising interest rates. Finance numbers to Upgraders, also broadly flat in the month (ex-refinancing), are down 13% over the last seven months.
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Jun WBC–MI Consumer Sentiment • • The Westpac–Melbourne Institute Consumer Sentiment Index fell by 5.7% in June from 108.0 in May to 101.9 in June. Following the 7% fall in May, the cumulative 12.3% fall in the Index over the last two months represents the largest two month fall since Mar–08. At that time the Reserve Bank had raised rates on two consecutive occasions pushing the variable mortgage rate to 9.35% and the global financial crisis was deepening.
Jun WBC–MI unemployment expectations • Consumers' unemployment expectations rose for the second consecutive month in June, confirming the commencement of an uptrend since February 2010. However, their trend level remains a substantial 38.4% below the February 2009 peak. The unemployment expectations index rose 7.7% in June to 120.33 following a 8.5% rise previously. Trend growth has risen to +2.5%mth and –30.8%yr from +2.1%mth and –36.0%yr previously. We assess this index via a smoothed trend deviation from its full history average as a guide for annual employment
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The fall in May was largely due to the RBA's third consecutive rate hike of the year. With rates left on hold in June, this month's fall in sentiment is unlikely to be due to interest rates.
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
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Westpac Weekly
Data wrap
growth seven months ahead. With the new uptrend in the index, that deviation measure increased for the third consecutive month, to –11.0% in June from –15.4% in May, up from a trough of –18.1% in March. • The deviation measure of unemployment expectations remains consistent with an ongoing acceleration in annual jobs growth through 2010 to around 3%yr from the current 2.2%yr trend pace, in line with our prognosis. However, the rise in the deviation measure over the last three months implies an easing back in annual jobs growth into 2011 to below 3%yr. That also remains consistent with our Westpac forecasts which have annual jobs growth peaking in 2010Q3 at 3.0%yr, easing a touch to 2.9%yr in 2010Q4 and remaining at that slightly more moderate pace in 2011H1. • Our composite of business survey employment indices, the LDI, is now sitting at a level consistent with ongoing smoothed jobs growth of around 20k per month. A key feature of today’s data was a 2.6%mth spike in derived average hours worked (sadj), sufficient to restore a rising trend. But considerable spare capacity remains, with their trend level still 2.2% below their mid-2008 peak. This also argues for continued moderate monthly jobs growth as average hours do more of the work. This continued moderate pace of monthly jobs growth will still see annual trend growth rise to 3%yr through 2010H2, consistent with medium term leads from job ads (still trending up solidly) and lagged domestic demand growth. Indeed, while monthly trend jobs growth slowed, annual trend growth rose in line with our prognosis to 2.5%yr from 2.3%, the highest since April 2008. The impact of the jobs gain on the unemployment rate was boosted by a 0.2ppt fall in the participation rate to 65.1% from 65.2% (from 65.24% to 65.09%). This saw weak labour force growth of 1.5k, allowing the 26.9k jobs rise to cut the unemployment rate 0.2ppts to 5.2% (consensus 5.4%, Westpac & bottom of the range 5.3%). The trend rate also fell to 5.2% after three months at 5.3%. We continue to expect moderate jobs growth and rising labour force growth to leave the unemployment rate downtrend very gradual, taking it to 5.0% by end 2010.
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Jun MI inflation expectations • Consumers' inflationary expectations eased in June to 3.4% from 3.6%, sufficient to stall their renewed uptrend since January 2010, but at an above average level. From 3.41% in January, trend consumers' inflationary expectations have risen to 3.59% in June, well above their inflation targetting period average of 3.16%. In June, some encouragement was seen with the proportion expecting inflation within the 2% to 3% target zone rising to 17.5% from 16.2% previously, back above its twelve month average of 17.3%. Inflationary expectations of managers and professionals rose to 3.9% in June from 3.5% in May, but they have trended down over the last five months to a trend level of 3.59%, the same as the consumers' trend level.
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May labour force • Employment rose 26.9k in May after a 35.3k gain previously, again above consensus (+20k). The breakdown was strong, with full-time jobs up 36.4k, their ninth straight rise. Nonetheless, monthly trend jobs growth has eased over the last six months to 18.4k from a Nov-09 peak of 35.0k, in line with our view that monthly trend jobs growth should remain on this more moderate path over 2010 as the spare capacity in the existing workforce is utilised.
Round-up of local data released last week
Date Mon 7 Jun Tue 8 Jun Wed 9 Jun Release May ANZ job ads May NAB business survey: business conditions Jun Westpac–MI Consumer Sentiment RBA Governor Stevens speech May housing finance May employment chg May unemployment rate Jun WBC–MI unemployment expectations Jun MI inflation expectations Previous –1.2% +8 108.0 – –2.9% 35.3k 5.4% 8.5% 3.6% Latest 4.3% +6 101.9 – –1.8% 26.9k 5.2% 7.7% 3.4% Mkt f/c – – – – –2.0% 20k 5.4% – –
Thu 10 Jun
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
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Westpac Weekly
New Zealand: week ahead & data wrap
One down ...
In a week chock full of data, the key event was the RBNZ’s 25 basis point OCR hike. The accompanying statement made it clear this should be seen as the first step in an extended series of rate hikes: “we have decided to begin removing some of the monetary policy stimulus that is currently in place”. The debate from here on will be around when and how much: “The further removal of stimulus will be reviewed in light of economic and financial market developments”. The RBNZ’s projection for 90-day interest rates showed the cash rate rising to 5.5-6.0% over the next few years. That’s not quite consistent with a 25bp hike at every review date for the next couple of years – but it’s not far off. The RBNZ is now confident that the economy is normalising, which implies that monetary policy settings should do the same. There’s an element of rebalancing going on, so the recovery isn’t being felt in all parts of the economy: household spending and credit growth are still subdued, and firms’ stated intentions to increase investment are not yet being acted upon. But on the plus side, the growth outlook for our major trading partners has continued to improve, and export commodity prices have reached new highs. This boost to export earnings is expected to eventually flow through to income growth in other parts of the economy. The market was perhaps surprised by the RBNZ’s relative comfort about the recent financial market ructions related to Europe’s sovereign debt woes – though it had said as much in the Financial Stability Report last month. While the RBNZ highlighted this as a substantial downside risk, the only impact on its central projections was in terms of the ‘knowns’: a downward revision to already-weak growth forecasts for Europe, and a rise in bank funding costs that the RBNZ assumes will be sustained. The other reason for raising rates now is the inflation outlook. Recent government policies – the GST increase, the Emissions Trading Scheme, and several rounds of tobacco excise hikes – will add 2.8 percentage points to the inflation rate at their peak early next year. As a consequence, the RBNZ expects annual inflation to reach 5.3% in June 2011, then moderate to around 2.7% in the latter years of their forecasts. The initial spike can be ignored, but the risk is that high inflation could feed into wage- and price-setting behaviour over the medium term, causing an ongoing inflation dynamic. Once inflation expectations become embedded they can be difficult to squeeze out, and the RBNZ’s own survey indicates that medium-term inflation expectations have already risen back towards the upper end of the 1-3% target range. The RBNZ appears to have adopted a cautious approach, running more with hawkish monetary policy as a hedge against the possibility of higher inflation expectations. This was expressed in their forecasts, which featured higher interest rates, a higher exchange rate, and higher bank funding costs, all of which cause lower economic growth and lower inflation once the effect of GST and other policy changes have washed out. That may well prove to be a prudent decision. Other data over the week set a generally disappointing tone. In Tuesday’s Q1 Quarterly Survey of Manufacturing, manufacturing sales declined 2.7%, mainly due to a 10.3% decline in dairy and meat product manufacturing. Ex-meat-and-dairy manufacturing sales were up only 1.3%, and production was probably flat. Building work put in place rose 0.7% in Q1, again slightly weaker than expected. Residential building work pick up by a modest 2.0%, while the shake-out in non-residential construction continued with a further 0.8% decline. We are still finalising our Q1 GDP forecast, but these data point in the direction of a significant downward revision to our current forecast of 0.8%. The Q1 Terms of Trade rose by a phenomenal 5.9%, as last year’s booming dairy prices finally hit the official figures. Another rise in Q2 is expected to propel the terms of trade to a new three-decade high. The Overseas Trade Index showed that import volumes were weaker than expected at 2.8%, while export volumes rose 3.0%, suggesting net exports will make a solid contribution to Q1 GDP growth. This was further confirmation of the weak consumer / strong export dynamic that has characterised the NZ economy throughout 2010. The weak consumer was in evidence yet again when May electronic card transactions rose only 0.2% after a sharp fall in April. And rounding out the week’s data, food prices fell by 0.7%, a large enough surprise to have us revising down our Q2 CPI forecast from 0.5% to 0.4%. It looks as though the strong exchange rate is being passed though relatively quickly into lower consumer prices. Next week is a little less busy on the data front. We expect ongoing weakness in the housing market to show up in the REINZ’s sales and price figures. Wednesday’s Westpac McDermott Miller Consumer Confidence survey will be an interesting test of how consumers have interpreted the budget. And the April Retail Trade Survey is expected to exaggerate the underlying trend of consumer weakness due to the timing of Easter.
Round-up of local data released last week
Date Tue 8 Jun Thu 10 Jun Release Q1 building work put in place Q1 real manufacturing sales s.a. RBNZ Monetary Policy Statement Q1 terms of trade May electronic card transactions Fri 11 Jun May food prices Previous 1.2% 2.7% 2.50% 5.8% –1.1% –0.5% Latest 0.7% –2.7% 2.75% 5.9% 0.2% –0.7%
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
5
Westpac weekly
Data previews
Aus Apr Westpac–MI Leading Index
jun 16, Last: 8.7% annualised
Westpac-MI Leading Index
12 9 6 3 0 -3 -6
Sources: Westpac-Melbourne Institute
% ann
long term trend
% ann six month annualised growth rate
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The Westpac–Melbourne Institute Leading Index continued riding high in March. The annualised growth rate in the index – a guide to the likely pace of activity over the following three to nine months – was 8.7%, a long way above its long term trend of 2.8%. Despite a rapid deterioration in financial markets since May, the Index's monthly components were still fairly mixed in April. Equity markets registered a mild fall, the ASX down 1.4% after a 5.1% bounce in March (it has fallen another 8.8% since then); dwelling approvals slumped 14.8% but this was just a partial unwind of March's 16.8% jump; money supply growth fell back from the fairly rapid 1.5% registered in March to a more subdued 0.4% in April; but growth in US industrial production picked up from 0.2%mth to 0.8%mth.
12 9 6 3 0
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recession
-3 -6 -9
-9 Mar-89
Mar-93
Mar-97
Mar-01
Mar-05
Mar-09
NZ Apr retail sales
Jun 14, Last: 0.5%, WBC f/c: –0.5%
NZ nominal retail sales
12 10 8 6 4 2 0 -2 -4 -6
Monthly s.a.
Source: Statistics NZ
% chg
% chg
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We expect April retail sales to reverse the gains made in March. The early timing of Easter this year meant that the usual preEaster spending boost was brought forward into March, while April experienced the lull of the Easter period itself. Looking beyond this timing effect, the underlying trend in retail spending remains soft. We estimate that total sales fell 0.5% in April, with core sales down 0.7%. The continued rebound in vehicle sales is likely to be one of the few saving graces. The New Zealand consumer is going through a soft patch, while the goods-producing sectors are currently providing more of the growth momentum. We still expect to see a revival in spending later in the year, once the pickup in activity starts to translate into income growth.
12 10 8 6 4 2 0 -2 -4
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Annual
-6 -8 Jan-10
-8 Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
NZ May REINZ house price index
Jun 15, Last: 6.2% yr
REINZ house prices
25 20 15 10 5 0 -5
Source: REINZ
ann % chg
Old series New series (stratified)
ann % chg
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The April REINZ report indicated a lacklustre housing market, with house sales still 4.3% below the December 2009 level, prices declining, and days to sell lengthening. With at least some of the recent weakness likely related to tax uncertainty surrounding Budget 2010 (which was released on May 20), we expect the May housing data to reveal a similar subdued picture. Looking forward, the tax changes in the Government’s 2010 Budget were a clear negative for house price growth in the short term. Thus, while there could be a surge in sales over coming months as people reorganise their affairs to reflect their changed tax position, we do not anticipate an improvement on prices.
25 20 15 10 5 0 -5
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-10 -10 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
6
Westpac weekly
Data previews
NZ Q2 consumer confidence
Jun 16, Last: 114.7
NZ Consumer Confidence
140 130 120 110 100 90 80
Source: Westpac McDermott Miller
index
index
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Consumer confidence moved modestly lower in the March 2010 quarter, but at 114.7 remained at a high level. A reassessment of future conditions drove the decline, while consumers’ assessment of current conditions actually improved. Economic news has been a bit of a mixed bag in recent months, but on the whole we expect the good to outweigh the bad. On the upside, unemployment has fallen sharply, high business confidence points to further improvements in the labour market, Fonterra has indicated a near-record payout for farmers in 2011, and the Government’s 2010 Budget included $15bn of income tax cuts over the next four years. On the downside inflation is spiking, and the near term outlook for house prices is weaker.
140 130 120 110 100 90 80 70
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70 Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08
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US Jun NY and Philly Fed surveys
Jun 15, New York Fed: Last: 19, WBC f/c: 24 Jun 17, Philadelphia Fed: Last: 21, WBC f/c: 17
60 40 20
US manufacturing surveys
index index
Sources: Factset, Westpac Economics
70 60 50
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Both these regional Fed factory surveys surged in the second half of 2009, the NY index peaking at 33 (highest since 2006) in Oct and Philly at 23 (highest since 2005) in Dec. Since peaking, they pulled back a touch, then recovered in April back to levels just shy of those late 2009 highs. However in May the NY index fell nearly 13 pts whereas Philly rose a further point. The softer NY Fed index could be an early indication that we are in for a period of slower industrial growth, as the impact on activity of fiscal stimulus and inventory building wanes. The Richmond and Dallas Fed factory indices also moderated in May. Hence we expect the Philly index to moderate in June. However the scale of the NY Fed index's May decline, and its inherent volatility, suggests that it will bounce in June, but leave in place a downtrend that will continue in H2 2010.
0 40 -20 -40 -60 May-04 30
NY Empire State Philly Fed ISM mfg
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May-05
May-06
May-07
May-08
May-09
20 May-10
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US May PPI and CPI
Jun 16, PPI headline: Last: –0.1%, WBC f/c: –0.9% Jun 17, CPI headline: Last: –0.1%, WBC f/c: –0.1%
6 4 2 0 -2
US price inflation
%ann consumer
*right axis
producer*
%ann
12 10 8 6 4 2 0 -2 -4
Sources: Factset, Westpac Economics
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The PPI headline has recently been boosted by sharp food price gains (due to recent weather damage to crops) on top of persistent energy price rises and volatility in new auto and truck prices (a big driver of swings in the core rate). But in April food and fuel prices began to reverse, although the core rate was held at 0.2% by higher auto prices. In May, fuel prices dumped and we expect that to drag the headline PPI down by almost 1%. Despite pressure from some components of the PPI, there has been minimal pass-through to retail prices, as evidenced by flat to negative headline/core CPI outcomes this year. Anecdotally, consumer goods firms say they have no pricing power and are wearing higher costs via narrower margins. In May, lower gasoline prices should weigh on the headline CPI again and the third consecutive flat core rate is expected.
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CPI
core CPI
PPI
core PPI
-6 -8
-4 Apr-00
Apr-04
Apr-08
Apr-00
Apr-04
Apr-08
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
7
Westpac weekly
Data previews
US May housing starts and permits
Jun 16, Starts: Last: 5.8%, WBC f/c: –5.0% Jun 16, Permits: Last: –10.9%, WBC f/c: 0.0%
2400 2000 1600 1200 800 400 Apr-90
US housing starts & permits
units
Sources: Factset, Westpac Economics
units
2400 2000 1600 1200 800 400
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Housing starts jumped 6% in Apr, led by single family homes (multiples fell sharply), but housing permits fell 11%, more than eliminating permits’ previous lead over starts - perhaps a sign that the end of the tax credit for homebuyers in April is already impacting on future construction activity. Assuming that is the case, then we expect a sizeable fall in starts in May, of around 5%, with more declines to come into mid-year, depending on the extent to which the tax credit pulled activity forward. The May decline would be steeper were it not for a likely bounce in the volatile multpiles component. Housing permits likely have further to fall too, though the size of the April pull-back means May could see temporary stability particularly if the multiples component bounces.
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housing starts
building permits
Apr-95
Apr-00
Apr-05
Apr-10
•
US May industrial production
Jun 16, Last: 0.8%, WBC f/c: 1.2%
US industrial sector: expansion mode
6 4 2 0 -2 -4 -6 May-00
Industrial production, 3mth % chg (lhs) ISM production index (rhs)
% change
Sources: Factset, Westpac Economics
index
•
US industrial production rose a solid 0.8% in April, and the factory sector was even stronger at 1.0% - the difference due to an ongoing contraction in utility output following the very cold weather earlier in the year. The factory ISM for May showed marginal slippage in the production index but it remained at a very high level (66.6), in contrast to slippage in many of the regional factory surveys. April orders data were mixed outside of the transport sector which was solid. Hours worked in the factory sector were up an impressive 1.4% in May. These factors point to a rise in industrial production in excess of 1% but the orders and regional survey wobbles hint at some downside risks, sufficient to prevent us from forecasting a rise in output faster than the gain in factory hours worked.
80 70 60 50 40 30
•
May-02
May-04
May-06
May-08
20 May-10
•
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
8
Westpac weekly
Key data & event risk for the week ahead
Last Mon 14 Aus NZ Inr Jpn Eur UK Can Tue 15 Aus NZ Jpn Eur Ger UK US Queen's Birthday holiday Apr retail sales Apr industrial Production %yr Apr industrial production, final %yr Apr industrial production May consumer confidence Apr auto sales RBA Deputy Governor Battellino speaking Jun RBA Board meeting minutes May REINZ house prices %yr BoJ Policy decision Apr trade balance sa €bn Jun ZEW economic sentiment May RICS house price balance % May CPI %yr Apr house prices %yr May import prices Jun NY Fed factory index Apr net long term TIC flows $bn Jun NAHB housing market index Q1 productivity – 0.5% 13.5% 31.8 1.5% 74 –4.2% – – 6.2% 0.1% 0.6 45.8 17% 3.7% 9.7% 0.9% 19.1 140.5 22 1.4% 8.7% 14.5% 114.7 1.6% a 2.2% –27k –0.1% 0.2% 5.8% –10.9% 0.8% 29.4% – 0.3% –18 –0.1% 0.0% 456k –115.6 21.4 –0.1% 1.4% 8.4% 0.6% 47k 8.8 3.3% 0.9% Market Westpac median forecast – –0.2% 14.3% – 0.6% 72 –5.0% – – – 0.1% – 48.0 – 3.5% – –1.2% 20.0 – 22 1.2% – 7.0% – 1.6% – –24k –0.5% 0.1% –3.3% 2.9% 0.9% 25.1% – 0.0% – –0.2% 0.1% 453k –119.3 21.0 0.4% – – 0.7% – – – – – –0.5% – – 0.6% – –5.0% – – – 0.1% – 40.0 – 3.5% – –2.0% 24.0 – 20 – – 5.0% – 1.6% – –25k –0.9% 0.0% –5.0% 0.0% 1.2% – – – – –0.1% 0.0% 450k – 17.0 – – –2.0% – – – – – Risk/Comment Public holiday in ACT, NSW, NT, Qld, Tas, Vic and SA. Unwinding March gains; trend growth remains weak. The manufacturing recovery has broadened of late. Initial weaker: also includes capacity utilisation measure. German IP known up 0.9% in April. Tentative date for Nationwide index, due 13-17/6. Guidance for Apr from StatCan is a 5% fall. Sydney (12:30 AEST) to Financial Executives International of Australia. On hold "near term" amidst global uncertainty; focus on int'l outlook. Uncertainty around tax changes still influencing market. First meeting under Prime Minister Kan. Consistently in surplus since September last year. Analysts are surely even more concerned about prospects for 2010. Bottomed at 9% in March: fewer surveyors expect higher prices. Base effects and BRC shop price index point to lower annual rate. Lesser watched DCLG measure. Plunging oil prices to drive import prices lower. Bounce from sharp May plunge but still well off its peak. Guide to extend/composition of current account deficit funding. Homebuilder confidence waning as buyer tax credit impact fades. Strong GDP growth but jobs have been rising too. Riding high in March but components became more mixed in April. Already up 27% over 2009H2 but still 12% below Q1 approvals. Indicators a mixed bag, but overall should support confidence. Core rate was just 0.8% yr in April. Sharp deceleration in H2 2009. Recent declines reflect return to GDP growth but jobs still falling too. Sharp oil price declines to weigh on headline PPI, while core will continue to be impacted by auto and truck price volatility. April decline in permits suggests pull-back in post tax credit activity will be fairly immediate. Hours worked in factories up 1.4% in May. Business surveys solid. Volatile biomed poses downside risks. Not usually market mover but these are interesting days! Somewhat lacklustre since Jan-Feb volatility. New orders measure. May was well improved on previous readings. Gasoline prices drifted lower in May and with core CPI expected to be flat for third month running headline CPI should fall again. Initial claims downtrend appears to have stalled. Trade deficit widening again but income and other flows not yet known. Delayed replication of NY Fed's May decline. April saw first LEI decline since April last year. March rise reversed Feb fall. FCAI figs showed highest May sales on record but still imply dip on April. April saw first positive annual % gain since Feb last year. Down from recent peak of 62k in Nov last year. Last figures ahead of June 22 "lifechanging" budget. Slowed from Feb 2009 high of 17.7% yr. Has not posted a decline since April last year.
Can
Wed 16 Aus Apr Westpac–MI leading index 6m anns'd% Q1 dwelling commencements NZ Q2 consumer confidence Eur May CPI final %yr Q1 labour costs %yr UK May unemployment change US May producer prices May PPI core May housing starts May housing permits May industrial production Thu 17 Sing Eur UK US May NODX %yr Jun ECB monthly report May retail sales incl fuel Jun CBI industrial trends survey May consumer price index May core CPI Initial jobless claims w/e 12/6 Q1 current account balance $bn Jun Philadelphia Fed index May leading index Apr wholesale sales May Motor vehicle sales May PPI %yr May mortgage approvals, major banks May PSNCR £bn May M4 money supply %yr May leading index
Can Fri 18 Aus Ger UK Can
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
9
Westpac weekly
Economic & financial forecasts
Interest rate forecasts
Latest (June 11) Cash 90 Day Bill 3 Year Swap 10 Year Bond 10 Year Spread to US (bps) International Fed Funds US 10 Year Bond ECB Repo Rate New Zealand Cash 90 day bill 2 year swap 10 Year Bond 10 Year spread to US 2.75 3.08 4.33 5.50 220 3.25 3.70 4.80 6.00 260 3.75 4.20 5.20 6.10 260 4.25 4.70 5.50 6.20 220 4.75 5.20 5.90 6.30 210 5.25 5.70 6.20 6.30 180 4.50 4.90 5.28 5.39 209 Sep 10 4.75 5.00 5.50 5.60 220 Dec 10 5.00 5.20 5.90 5.90 240 Mar 11 5.00 5.20 5.90 5.90 190 Jun 11 5.25 5.50 6.10 6.00 180 Sep 11 5.50 5.75 6.25 6.00 150
0.125 3.30 1.00
0.125 3.40 1.00
0.125 3.50 1.00
0.125 4.00 1.00
0.125 4.20 1.00
0.375 4.50 1.00
Exchange rate forecasts
Latest (June 11) AUD/USD NZD/USD USD/JPY EUR/USD AUD/NZD 0.8447 0.6812 91.59 1.2106 1.2400 Sep 10 0.88 0.72 92 1.22 1.22 Dec 10 0.90 0.74 95 1.22 1.22 Mar 11 0.92 0.76 98 1.18 1.21 Jun 11 0.90 0.75 102 1.18 1.20 Sep 11 0.88 0.74 105 1.16 1.19
Australian economic growth forecasts
2009 Q3 GDP % qtr ann change Unemployment rate % CPI % qtr ann change CPI underlying % qtr ann change 0.3 0.9 5.8 1.0 1.3 0.8 3.5 Q4 1.1 2.8 5.6 0.5 2.1 0.6 3.3 2010 Q1 0.5 2.7 5.3 0.9 2.9 0.8 3.1 Q2f 0.9 2.8 5.3 0.8 3.2 0.7 2.9 Q3f 1.0 3.5 5.1 1.2 3.5 0.7 2.8 Q4f 0.8 3.3 5.0 0.4 3.3 0.6 2.8 2011 Q1f 0.9 3.7 4.8 1.0 3.4 0.8 2.8 2008 – 2.3 4.2 – 3.7 – 4.4 Calendar years 2009 – 1.3 5.6 – 2.1 – 3.3 2010f – 3.0 5.1 – 3.3 – 2.8 2011f – 3.5 4.8 – 3.1 – 3.0
New Zealand economic growth forecasts
2009 Q2 GDP % qtr Annual avg change Unemployment rate % CPI % qtr Annual change 0.2 –2.2 5.9 0.6 1.9 Q3 0.3 –2.3 6.5 1.3 1.7 Q4 0.8 –1.6 7.1 -0.2 2.0 2010 Q1f 0.8 –0.3 6.0 0.4 2.0 Q2f 1.2 1.0 6.1 0.5 2.0 Q3f 1.3 2.4 5.7 1.3 2.0 Q4f 1.2 3.4 5.5 2.7 4.9 2008 – –0.2 4.6 – 3.4 Calendar years 2009 – –1.6 7.1 – 2.0 2010f – 3.4 5.5 – 4.9 2011f – 4.4 5.0 – 2.6
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
10