Research Team, 23 June 2017

Oil prices took centre stage this week, driving markets lower as prices plummeted to the lowest they have been all year. Fresh concerns of oversupply, particularly in the US, have resurfaced despite OPEC nations committing to limiting production out to 2018. The plummeting oil prices drove the Australian index to have its worst single day decline of the year, while pulling other markets back from all time or multi-month highs.

In terms of economic data, the focus was largely on New Zealand after a couple of quiet weeks on the local front. Top of the list for New Zealand investors was the Reserve Bank of New Zealand’s June meeting. Expectations were for the RBNZ to hold the Official Cash Rate for the fourth meeting in a row, and this held true with the OCR remaining at 1.75%, an all time low.

The commentary was again the focus for analysts, which was reasonably upbeat. Despite the weakness from the first quarter GDP, the growth outlook for NZ is positive. Missing from the usual rhetoric was commentary on the currency being too high. We have again seen strength from the Kiwi dollar, with the TWI up around 3% since May. The currency gained further strength on the back of this although gains were pared back later in the day.

Inflation was again in the spotlight, as it had increased in the March quarter however, the increase was driven by temporary factors which are expected to moderate. The RBNZ expect that there will be some volatility in headline inflation, but will increase gradually, with long term inflation expectations anchored at 2%. In addition to this, house price inflation has moderated, influenced by the loan-to-value ratio restrictions and tighter lending conditions. As noted in the latest release from the Real Estate Institute of NZ, more houses are for sale around the country and they are taking longer to sell, prompting speculation that slowing house prices are expected to continue.

Despite the positivity surrounding the growth outlook for NZ and inflation normalisation, the key comment was that monetary policy is expected to remain accommodative for a considerable period as numerous uncertainties remain. This was the same comment that was in the last release but it seems like the market took it more seriously this time, with expectations for the next rate hike pushing out further. The market is pricing in around a 50% chance that rates will remain on hold for the next 12 months.

The latest Global Dairy Trade auction saw a small decline in the dairy price index, falling 0.8%. This was largely expected in the lead up to the auction with futures pricing in a small decline. This was the first auction in seven that saw a price decline and was on slightly lower volumes. Whole milk powder prices slipped also, down 3.3%, its second decline in as many auctions. Skim milk powder prices increased again, steadily erasing the declines from earlier in the year.

Migration continues to be a hot topic for New Zealand and this week saw yet another record yearly gain in May. For the year, net migration was 73,300 with gains largely driven by Australians moving to New Zealand and Kiwis returning home. The number of migrants on student visa’s declined, while the number of those arriving with work visas increased again as recent trends continue. Visitor arrivals also increased for the year with just over 3.6 million visitors. Of these visitors, 40% were from Australia while Chinese tourists made up 11% of total visitors.

Coming up this weekend are a number of flash PMI’s (purchasing managers’ index) for June. Flash PMI’s are an initial reading on economic activity. Last month’s reading saw Japanese PMI improve to the strongest level in three months, while Europe remained very strong, remaining unchanged at the six year high set in April. The US manufacturing PMI declined for the fourth consecutive month in May and is now at the lowest level since September, however it remains above 50, which indicates expansion.