New Zealand: RBNZ Rate Decision Eyed As Inflation Expectations Sputter

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Includes: ACOPF, ENZL, NZDS
by: Interactive Brokers
Summary

Market participants in the week ahead will receive further insights into New Zealand’s economy, including updates on inflation measures, as well as a rate decision from its central bank.

The RBNZ assumed a more dovish tone at its latest monetary policy meeting in March, when it noted that the more likely direction of its next OCR move is "down".

Meanwhile, a weaker global economic outlook has prompted several global central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.

And while a recent rise in food prices may have been a burden to households, it could have helped some New Zealand stocks.

Asia-Pacific: The Week Ahead (May 6-10)

Market participants in the week ahead will receive further insights into New Zealand’s economy, including updates on inflation measures, as well as a rate decision from its central bank.

The week gets underway Monday with a gauge of business expectations for second quarter of 2019 inflation, after sentiment in the first three months of the year cooled.

According to the Reserve Bank of New Zealand’s (RBNZ) most recent quarterly Survey of Expectations of businesses, inflation expectations for one year ahead diminished in Q1’19 to 1.82% from 2.09% in the prior quarter, while the two-year outlook remained steady at 2.02% vs 2.03% previously.

Monday, May 6

  • Inflation Expectations (Q2)

Notably, house price inflation expectations fell from 2.86% to 1.91% over a one-year, and from 2.31% to 2.14% over a two-year time horizon.

Against this backdrop, New Zealand businesses expect GDP to grow at a 2.38% and 2.36% rate for one and two years ahead, respectively.

Meanwhile, the RBNZ has maintained its Official Cash Rate (OCR) at 1.75%, where it has resided since November 2016.

Tuesday, May 7

  • RBNZ - OCR Decision & Monetary Policy Statement

The RBNZ assumed a more dovish tone at its latest monetary policy meeting in late March, when it noted that given the “weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.”

While the central bank observed that the country’s employment figures have neared its maximum sustainable level, core consumer price inflation has stayed under its 2% target, “necessitating continued supportive monetary policy.”

The RBNZ added that the balance of risks to its outlook has shifted to the downside, amid a weaker global economic outlook that has affected some of the nation’s key trading partners, including Australia, Europe, and China.

In fact, the weaker outlook has prompted several global central banks to ease their expected monetary policy stances, placing upward pressure on the New Zealand dollar.

Forex

In the Q1’19 RBNZ Survey of Expectations, businesses generally anticipate the New Zealand dollar and U.S. dollar exchange to dip from 0.677 in late January to 0.67 at the end of June 2019, and 0.66 at the end of December 2019.

The New Zealand /Australia dollar exchange rate is expected to fall from 0.950 in late January to 0.94 at the end of June 2019 and further decrease to 0.92 at the end of December 2019.

Credit Profile

Moody's Investors Service, which has assigned its pristine ‘Aaa’ sovereign credit rating on New Zealand, recently noted that the country’s “very strong” credit profile enables it to “mitigate external and domestic vulnerabilities related to the economy's high reliance on external financing and its elevated level of household debt.”

Moody’s analyst Matthew Circosta said while “the potential for further trade restrictive policies around the world remains a threat to export growth,” relatively “inelastic global demand for the country's food exports, in particular high-quality dairy products, mitigates this risk relative to other Asia-Pacific economies.”

However, he added that business confidence weakness “remains a risk to investment and hiring.”

Elsewhere, investors in the latter part of the week are also set to receive April’s retail card spending numbers, and over the weekend, they will get further inflation color from New Zealand’s food prices.

Thursday, May 9

  • Retail Card Spending (Apr)

Sunday, May 12

  • Food Inflation (Apr)

New Zealand's food price index (FPI), which measures the changes in prices that households pay for food, rose 0.5% in March from the prior month, highlighted by higher costs for fruit and vegetables (+3.7% m/m) and meat, poultry, and fish (+1.3% m/m).

On a year-over-year basis, the FPI increased 1.2% over March 2018, underscored by a 2.1% climb in non-alcoholic beverage prices and a 1.4% rise in grocery food costs.

While the rise in food prices may have been a burden to households, it could have helped some of New Zealand stocks.

Stocks & ETFs

Certain of the country’s equities – as evidenced by the iShares MSCI New Zealand ETF (NASDAQ: ENZL), which has as its top holding a2 Milk Company (OTCMKTS: ACOPF) – have climbed roughly 19.53% from their most recent 52-week low set in late October 2018.

Indeed, a2’s interim results for the half-year ended December 2018 shows a 41% year-on-year surge in total revenue to just north of NZ$613m, while EBITDA soared 52.7%, and after-tax net profits jumped over 55%. The company earned 20.9 cents per share over this period, a rise of nearly 53% from the prior year.

A2 said that it “invested strongly” in the first half of the year in both internal and external capability “to better understand” its Chinese consumers, as well as channel dynamics and ways of improving brand awareness.

After a “very strong first half performance, and encouraged by growing market share in China,” a2 added that it is “now in a position to reinvest the benefits of scale into increased marketing activities in the second half.”

The firm’s stock has skyrocketed more than 85% from its latest 52-week low set in October 2018. It was last trading at around NZ$15.43 intraday Wednesday on the Australian Securities Exchange, according to the IBKR Trader Workstation.

Market participants will likely be paying close attention to the RBNZ’s rate decision for any signs of a further dovish tilt, as well as the unfolding of U.S.-China trade talks, Brexit, domestic household consumption and inflation for additional insights into the country’s general economic and financial well-being.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Note: This material was originally published on IBKR Traders' Insight on May 1, 2019.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: I am receiving compensation from my employer to produce this material.