THE WEEK AHEAD: RBNZ LIKELY TO UPGRADE ECONOMIC FORECASTS
Mark Lister, 24 May 2021
Global sharemarkets were mixed last week, with the S&P 500 and FTSE 100 (in the US and the UK) both falling 0.4%. In contrast, Europe’s Stoxx 600 managed a 0.4% gain, while the ASX 200 in Australia added 0.3%.
The local NZX 50, which has a habit of bucking the global trend, outpaced all of these with a 0.7% rise. However, the local market is still down 4.8% in 2021 (having lagged most other markets which are up strongly) and 8.1% below its peak.
The US 10-year Treasury yield finished the week at 1.62%, only marginally below where it started it, while the New Zealand five-year swap rate fell from 1.24% to 1.19%. This came after forecasts in the Budget pointed to a larger pipeline of government bond issuance than many had expected.
Bitcoin continues to be exceptionally volatile, falling another 24.3% to end the week a little over US$35,000. The cryptocurrency hit a high of almost US$65,000 last month, and at one point last week it had tanked 53.7% in just five weeks. Bitcoin is still 26.0% higher than where it began the year, although such extreme moves will have no doubt unnerved some of the more recent crypto investors.
The highlight of the week will undoubtedly be the latest Monetary Policy Statement (MPS) from the Reserve Bank of New Zealand (RBNZ). This will be released at 2:00pm on Wednesday, with a press conference to follow. The last MPS we saw from the RBNZ was in late February, and most things have improved since then. Dairy prices have remained strong, unemployment has proved to be lower than expected, business confidence has risen strongly, and the housing market continues to power ahead. At the same time, two-year ahead inflation expectations rose to 2.05%, the highest in two years. Against that backdrop, it’s difficult to argue the case for extremely simulative monetary policy settings.
It's safe to say the RBNZ will upgrade its economic forecasts, painting a more positive picture for the labour market and acknowledging the likely higher path of inflation. However, it will be the forecasts for the Official Cash Rate (OCR) which will get the most attention, if they are published, that is. The RBNZ stopped publishing an OCR track in May 2020, partly because it had provided forward guidance of "no change for 12 months" and also because banks were preparing themselves for a negative OCR (which had been mooted as a possibility). The forward guidance expired in March of this year, while banks have got their systems in order for a negative OCR (even though that's no longer likely).RBNZ forecasts will go out to early 2025, so if the traditional OCR projection does return, there will be a lot of focus on when the RBNZ pencils "lift off" in. The local banks have some differing views on when the OCR might increase from its current record low of 0.25%. At one end of the spectrum, BNZ expects the OCR to begin rising in the June quarter of next year, while Westpac sees no change until early2024.
There are plenty of corporate announcements to watch in New Zealand this week. The highlights will almost certainly be Mainfreight and Fisher & Paykel Healthcare, two of the largest and most widely followed companies on the NZX, both of which are reporting 2021 full year results. Other notable earnings releases will come from Napier Port, Turners, Gentrack and EROAD. Restaurant Brands and Vista Group are holding AGMs, while Fletcher Building will host an investor day (as will APA Group in Australia).
Elsewhere, US inflation will again be in the spotlight, with the release of the core PCE index for April. If market estimates are accurate, the Federal Reserve's preferred inflation measure could see the highest pace of annual inflation in almost 30 years. The US quarterly earnings season is 95% complete, although there are still a few interesting releases to come.