Research Team, 24 March 2017

It has been a fairly busy week for New Zealand in terms of information being released, with the Reserve Bank of New Zealand’s (RBNZ) Official Cash Rate (OCR) announcement on Thursday the highlight of the week. In addition to this, the latest Global Dairy Trade auction was held with surprising results, migration data for February was released as well as two members of the NZX50 reporting half year results.

Global markets took a swing lower this week, as fears grew over what the Trump administration in the US might actually be able to implement in terms of its stimulus package. The three main US indices fell more than 1% on Tuesday, all experiencing their worst single day decline since before the election. Global markets followed them lower as well with the Japanese Nikkei falling almost 2% in a single day. The local market was certainly lead by the deep falls from its global peers, however losses were a lot more muted.

The RBNZ’s OCR announcement was certainly the main event for the week for New Zealand investors. Although it seemed a given that the RBNZ would hold rates steady this month, the commentary that accompanied the decision was always going to attract interest. The rate was held at the historic low of 1.75% for the second month in a row and it looks likely to stay at this level for a significant period of time.

The statement said that monetary policy will remain accommodative for a considerable period. The exchange rate has fallen 4% since February which the RBNZ is pleased about, however they would like to see it weaken further to achieve more balanced growth. Although quarterly GDP was weaker than expected for the fourth quarter of 2016, as it was impacted by temporary factors, the growth outlook remains positive. House prices are moderating and headline inflation has returned to the target band and longer term expectations see inflation remaining around 2%. The market is pricing in zero chance of a rate hike at the next meeting in May, although is pricing in a 1% chance of a further rate cut. The majority of the market sees the RBNZ raising rates in the first quarter of 2018.

One of the factors that the RBNZ highlighted as contributing to growth is the strong level of migration. February’s net migration was equal to the record set in the previous month, hitting a net inflow of 71,300 people. Those coming on a work visa made up around a third of all arrivals, with most of these coming from the UK and Europe. New Zealanders and Australians made up the second largest group of arrivals, while the number of students arriving decreased from prior months. The number of those arriving on a short-term basis also equalled the annual record set last month and increased 10.7% from February last year, with 3.544 million visitors arriving.

The dairy sector was again in focus this week with the latest Global Dairy Trade auction results showing a 1.7% rise in the average price of dairy. This put an end to the losing streak which had wiped more than 9% off the index in two auctions. In positive news for New Zealand farmers, whole milk powder increased 2.9% at the auction, and although is still lower than where it started the year, this was a move in the right direction. In further positive news, the auction gain came despite an increase in volume sold, boosting optimism that the market can cope with increased volumes.

Expectations are for dairy prices to be fairly stable from here and Fonterra is expected to maintain its current forecast farmgate milk price of $6.00 per kg of milk solids. This was reiterated with the release of the company’s first half result, announced this week also. The half saw an increase in profit of 2% from the previous year for the dairy co-operative. However, forecast earnings per share were cut to a range of 45 – 55 cents, a five cents per share decrease at both the top and bottom end