Key Global Developments And Financial Markets
Perhaps the most significant event for financial markets in March was the change in Fed Chairman Greenspan's testimony
between his first and second appearances before Congress. The more upbeat tone of Greenspan's second testimony was
prompted by the sharp recovery in the ISM data, allowing him to conclude that the contraction phase of the economy "has
drawn to a close" and that "the recent evidence suggests that an economic expansion is already well under way". This
change triggered a sharp sell-off in fixed income markets. Subsequently, the FOMC meeting on 19 March saw the stated
balance of risks shift from "economic weakness" to a neutral setting, causing the market to price an even more
aggressive series of rate hikes. However, towards the end of the month, evidence emerged that the Fed was becoming
concerned about the possible impact that higher market rates might have on the economy. An array of Fed Governors went
to some lengths to underline the lack of urgency to raise rates. While this provided some support for the market as
March drew to a close, the bigger change in the Fed's view earlier in the month seemed to be very much in the minds of
investors. The stronger than expected Chicago PMI undermined the impact of the "Fed speak" (as did the very strong ISM
on 1 April).
Elsewhere, encouraging signs of recovery have emerged. In Germany, the Ifo rose to 91.8 from 88.5 from February, a level
that leaves it close to its long-term average of 92.7. This was the fifth rise in a row. The expectations component of
the survey rose even more, rising to 106.2 from 101 in February, with the three month rise the strongest since 1983. In
line with the recovery in the US, Canadian data have also recovered strongly. Almost all the Canadian indicators have
surprised on the upside in the past couple of months including, unfortunately for bond-holders, inflation. Sentiment in
Japan also seems to be improving, with a strong rise in the Nikkei over the past 7 weeks since its low of 9421. Not all
the data are pointing to a recovery, with the tertiary activity index falling 1.1% mom in January and the Tankan on 1
April also disappointing. However, our Japanese economists are sufficiently confident about the near term cyclical
outlook to revise up their Japanese growth forecasts.
KEY NEW ZEALAND DATA AND EVENTS
ANZ Commodity Prices (Feb) - 5 Mar: The average foreign currency price of New Zealand's commodity exports rose by 0.8%
mom in February but was 4.7% lower than a year earlier. Reflecting the depreciation of the NZD during February, the NZD
price index rose by 1.7% mom but was 2.4% lower than a year earlier.
Motor Vehicle Registrations (Feb) - 5 Mar: Registrations of new vehicles fell 8.3% mom (sa) to be just 3.5% higher than
a year earlier. Used vehicle registrations s rose 6.8% mom to be 32% ahead of last year.
Building Work Done (Q4) - 5 Mar: Real residential building activity rose 21.6% qoq. As a result, while non-residential
activity declined 10.6% qoq, overall construction activity posted a 6.6% qoq rise. External Migration (Jan) - 7 Mar: A
net 3360 people migrated permanently to NZ in January, the strongest inflow this cycle and close to the peak inflow
during the mid 1990s migration surge. Tourist arrivals also continued to rebound, rising 5.7% mom/3.6% yoy.
Retail Trade (Jan) - 11 Mar: Retail sales rose 0.5% mom (0.9% mom ex-autos) compared with market expectations of a flat
result. Strong growth in sales of food and recreational goods was the key driver. Overseas Trade Index (Q4) - 12 Mar:
The terms of trade fell 2.2% qoq, driven by a 1.8% qoq decline in export prices. Export volumes fell 1.8% qoq while
import volumes rose 1.8% qoq, the latter driven by strong growth in capital imports.
ANZ Job Ads (Feb) - 13 Mar: Following six months of weakness, the number of newspaper job advertisements rose a sharp
6.2% mom in February to be 4.7% lower than a year earlier.
Food Price Index (Feb) - 13 Mar: The FPI fell by 0.5% mom, driven by a decline in fruit and vegetable prices and an
unexpected decline in grocery prices. As a result, we revised our forecast of the Q1 CPI down to 0.6% qoq.
Manufacturing Survey (Q4) - 14 Mar: The real value of manufacturing sales rose 1.0% mom, with growth concentrated
primarily in the primary foods sector. International Consensus Forecasts (Mar) - 18 Mar: The trade-weighted 14 country
index points to growth of 2.3% in 2002 (previously 2.0%) and 3.5% in 2003 (previously 3.4%). An upward revision to US
and Australian growth forecasts was the key reason for the brighter near-term outlook for 2002.
RBNZ Monetary Policy Statement and OCR Review - 20 Mar: The RBNZ decided to begin the retightening cycle earlier than
most analysts and the market expected, raising its cash rate by 25bps to 5% and signaling that a further 100bps of
tightening should be expected by year-end. The front end of the curve sold-off 20bps.
REINZ House Sales (Feb) - 20 Mar: The number of house sales surged a further 12.0% mom, to be 41% higher than a year
earlier. The median sales price was 7.2% higher than last year (3 month average was 4% higher).
External Migration (Feb) - 21 Mar: A net 3020 people migrated permanently to NZ in February, the second strongest inflow
this cycle. Surprisingly, tourist arrivals fell 4.7% mom, but were 6.2% higher than a year earlier.
Building Consents (Feb) - 26 Mar: The number of dwelling consents issued rose 12.7% mom in February to be 25.4% higher
than a year earlier. A surge in intended apartment construction explained the latest rise.
WestpacTrust Consumer Confidence (Q1) - 27 Mar: Confidence rose to 120.2 from 118.4, driven by an improvement in
optimism regarding the 12 month economic outlook.
Overseas Merchandise Trade (Feb) - 27 Mar: A provisional merchandise trade surplus of $269m was recorded in February.
The annual trade surplus was $512m, compared with a deficit of $1,096m a year earlier.
Balance of Payments (Q4) - 27 Mar: A current account deficit of $1.84bn was recorded in Q4 (mkt expectation was $1.6bn).
While the annual deficit declined to 3.2% of GDP, the annualised and seasonally-adjusted Q4 deficit was 4.8% of GDP,
confirming that the current account deficit is now on a deteriorating trend.
GDP (Q4) - 28 Mar: GDP rose 0.6% qoq in Q4, following growth of 0.2% qoq in Q3. The median market expectation had been
for a rise of 1.1% qoq while the RBNZ had forecast growth of 1% qoq with upside risk. Domestic demand was the driver of
growth during the quarter. The external sector made a substantial negative contribution to growth, including a greater
than expected impact stemming from the tourism sector as a result of the 11 September tragedy (exports of services
declined 7.3% qoq, subtracting 0.3pps from growth).
NBNZ Business Survey (Mar) - 28 Mar: Confidence rose to +20 (net respondents) from +16% while firms' assessment of their
own activity outlook improved to +41% from +39%. Retailers' pricing intentions eased slightly to +30% from +33% but
economy-wide pricing expectations rose to +25% from +21%.
NZ MARKETS
The RBNZ's unexpected March tightening caused the market to bring forward and amplify the aggressive rate hike cycle
that had already been priced. The market is now fully pricing a 25bps hike in April and a 50bp hike in May, with the OCR
expected to reach a peak of 7.5% in 2003. As a result, the bond curve has flattened between 3Y and 10Y. The NZ 10Y rose
29bps to 6.87% during the month. However, it outperformed its US counterpart - the spread narrowed 17bps to 153bps. The
NZD has been a strong performer over the month, rising from USD0.42 towards USD0.44 while the Trade Weighted Index rose
from 51.38 to 53.08. In contrast to global trends, the local equity market again struggled, with the NZSE40 finishing
the month just below its late February level, despite sizeable gains on Wall Street.
POLITICS
The Government maintained its big lead over the National Party, reflecting ongoing public disappointment with the
performance by Opposition leader Bill English and the positive reaction to good economic news. The latest Colmar-Brunton
poll showed Labour down 2pp to 49% support, National unchanged at 35%, Alliance (the junior coalition partner) up 1pp to
2%, ACT unchanged at 4%, the Greens unchanged at 5% and NZ First unchanged at 2%.
Darren Gibbs, Senior Economist