Data Flash (NZ) Retail Sales - January 2002

Result: Retail sales rose 0.5% mom versus market expectations of a flat result.

Implication for markets: The robust result is consistent with a our view that the RBNZ will soon begin to tighten monetary policy. However, we continue to believe that the market is overly pessimistic in pricing a rate hike before the May Monetary Policy Statement.

Commentary

Retail sales growth continued at a robust pace in the first month of 2002, following the strong rates of growth achieved in the closing months of 2001, driven by continued employment and wage growth, the lagged impact of growth in farm incomes, a further strengthening in the housing market, a strong recovery in tourist arrivals and improving levels of consumer confidence. Given our expectation that retail sales growth will remain resilient over the next couple of months, volume growth is shaping up to exceed 1% qoq in Q1, which would underpin another solid GDP result (we estimate that GDP grew 1.2% qoq in Q4). In our view, the continued strength of New Zealand data, reinforced by increasingly upbeat global data, means that the likelihood of a RBNZ rate hike in Q2 is now extremely high, as reflected in market pricing, but not yet fully reflected in the surveys of economists' opinion. As discussed in our latest quarterly Economic Forecasts, which will be released tomorrow, we expect the RBNZ to lay the initial groundwork for the tightening cycle in its 20 March Monetary Policy Statement.

However, contrary to current market pricing, we think that the Bank can afford to maintain current settings until the 15 May meeting. By this time, evidence regarding the sustainability of the emerging US recovery should be clearer while further information on domestic inflation, confidence and trends in the labour market will have been released. We expect a 25bps hike on 15 May, but the balance of risks is tilted towards a greater hike rather than no hike at all.

We now expect the Fed to begin tightening at the end of June, with the RBA expected to follow soon after and the ECB expected tighten towards year-end.

Key points

Total nominal retail sales rose 0.5% mom in January to be 8.6% higher than a year earlier. The market had expected a flat result. Excluding auto sales and services, core retail sales rose 0.9% mom/8.9% yoy.

Strong growth in sales of food (+2.1% mom) and recreational goods (+11.9% mom) - both rebounding from declines in December - accounted for all of the growth in core sales in January. Modest growth in most other storetypes was offset by a 3.4% mom decline in appliance sales. A 1.5% mom rise in the food prices is likely to have made a significant contribution to growth in food sales during January. Growth in recreational goods may have been amplified by purchases of high-value marine equipment. However, the underlying trend in retail spending is clearly upwards in our view.

As suggested by a decline in motor vehicle registrations, motor vehicle sales posted a 1.5% mom fall. This fall was only partially offset by a 0.3% mom rise in motor vehicle services.

On a regional basis, sales rose in all regions. However, the Wellington regions continues to substantially underperform the rest of New Zealand, with sales in January rising just 0.1% mom/2.2% yoy.

Ends

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