BNZ Weekly Overview March 10 2011


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In this issue I discuss the RB\'s 0.5% cut to the official cash rate, data still showing weakness in the NZ economy, and tractor registrations!

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BNZ Weekly Overview March 10 2011

  1. 1. BNZ Weekly Overview 10 March 2011Mission StatementTo help Kiwi businesspeople and householders make informed financial decisions by discussing theeconomy and its implications in a language they can understand.In this week’s issue….Monetary Policy Eased 1 Housing Market Update 12Is Our Economy Getting Better? 5 Major Offshore Issues 14Interest Rates 9 Foreign Exchange 15The Weekly Overview is written by Tony Alexander. The views expressed are my own and do not purport torepresent the views of the BNZ. To receive the Weekly Overview each Thursday night email me with ‘Subscribe” in the Subject line.Monetary Policy EasedThe Reserve Bank this morning cut its official cash rate as we expected by 0.5% back to the record low of2.5% reached in April 2009 as they were responding to the global financial crisis. They logically have citedthe weakness in economic activity produced by the February 22 earthquake as prime reason for the cutbut also note as we have been noting that even before that terrible event the economy was proving to beweaker than hoped for just three months ago. Consumers have cut spending on housing and retailingwhile rising farm incomes are predominantly leading to debt reduction rather than increasing spending.The Reserve Bank note that future monetary policy decisions will be guided by the data (as opposed to aparticularly strong view regarding what happens 12-18 months down the track) but that they anticipateremoving “current monetary policy accommodation” once the post-earthquake rebuilding phasematerialises. Normally one would be able to interpret what this means for monetary policy by looking at theusually detailed RB economic forecasts. But this time around in light of the massive uncertainty regardingthe impact of the earthquake on economic activity they have cut back their presentation and note thenumbers they provide should not really be thought of this time as forecasts but the scenario underpinningthe decision to cut the cash rate. But for the record they appear to have pencilled in cash rate increases ofabout 1.25% over 2012 then another 0.5% over 2013.But we repeat our very long running warning. One would be extremely unwise to develop an interest raterisk management strategy in the current and prospective economic environment on the basis of anyparticular set of interest rate forecasts. These forecasts have changed substantially over the past threeyears and will almost certainly continue to do so over the coming three.The rate cut and the words were almost exactly as we and the markets were expecting so the impact todayon interest rates and the exchange rate has been limited. But now that a rate cut is confirmed it is fairlyclear that recent cuts in fixed home loan rates will be followed by a sizeable cut in floating rates and thatwill be of benefit to many people with some 50% of mortgage volume now sitting at a floating rate. Page 1
  2. 2. BNZ WEEKLY OVERVIEWOutflows To Australia – Away They GoOne of the key points we are hammering is that courtesy of the large unemployment rate and exchange rategap plus a few other factors thrown in there will be a very very large surge in net migration outflows toAustralia over the coming month. (Email me at if you want a copy of our paperexamining this issue.) In January this year the net outflow was a whopping 3,518 which is the biggest onemonth loss since January 2009 – meaning that January usually produces a big number. NET MIGRATION FLOWS NZ vs. AUSTRALIA 15000 12 month total 0 -15000 -30000 Net loss Source : Statistics NZ -45000 79 81 83 85 87 89 91 93 95 97 99 1 3 5 7 9 11But the annual net outflow now stands at 22,378 from 16,019 a year ago. We are headed probably quicklyback to then beyond the net loss of 35,000 seen in late – 2008 and if employers have not given thought tothis factor and instead just focus on the high NZ unemployment rate of 6.8% they are going to findthemselves badly positioned about 12-18 months from now – especially once Christchurch rebuilding startssucking up anyone who can hold a hammer.Irish Eyes Not Looking This WayJust for your guide and because this issue crops up in a positive sense in the Australian media now andthen, there is zero evidence that the Irish fleeing their country are heading our way. Over the year to Januarythe gross inflow of Irish here was only 1,295. This was down from 1,628 a year earlier and in the Januaryquarter gross inflows were 11.3% lower than a year earlier. How bad does one’s country have to be forfleeing Irish not to want to come here! MIGRATION TO NZ FROM IRELAND 1800 70 % 60 1600 Annual total 50 1400 lhs 40 1200 30 1000 20 800 10 0 600 3 month change -10 400 vs year ago rhs -20 200 -30 0 -40 7 8 9 10 11The Petrol BurdenFor your guide, in the year to June 2010 the average NZ family spent $40.90 a week on petrol. Over theyear petrol prices averaged $1.70 for 91 octane fuel. If prices soon settle at $2.20 then average weeklyexpenditure in the absence of any behavioural change will be almost $53. Average weekly householdincome over the year to June 2010 was $935. The trouble with these numbers however is that they coverevery single household in the country whereas we all have specific household characteristics. Families will Page 2
  3. 3. BNZ WEEKLY OVERVIEWhave extra petrol costs due to taking the children to and from school, sports events, weekend birthdayparties and so on. Realistically then all one can say without getting into the deep household sub-groupcategories contained in the Statistics NZ Household Economic Survey is to note that on average our petrolcosts are ahead about 30% from where they were last June year and because changing behaviour is difficult(witness Lindsay Lohen and Charlie Sheen), we will pay for the extra petrol by cutting spending elsewhere.We have had a very subdued outlook for retailing over 2011 for some time now and can only reinforce ourcomments that retailers should not think in terms of managing their businesses in a growing environment butin terms of emphasising most profitable products, those with pricing power and so on. Only believe thatcustomers are flocking back once you have seen the whites of their eyes for perhaps three solid months in arow.Having said that there will be boosts for many in Christchurch once people start using insurance payouts torefurnish their houses – if they are habitable. NZ PETROL PRICES 240.0 cents 220.0 91 octane per liter 200.0 180.0 160.0 140.0 120.0 2006 2007 2008 2009 2010 2011 100.0 25/6 3/6 29/7 23/9 18/11 13/1 10/3 2/5 30/6 25/8 20/10 15/12 9/2 6/4 1/6 27/7 21/9 16/11 11/1 8/3 3/5 28/6 23/8 18/10 13/12 7/2 3/4 29/5 24/7 18/9 13/11 8/1/0 5/3 30/4 20/8 15/10 10/12 4/2 31/3 27/5 22/7 16/9 11/11 6/1/1 3/3If you want historic petrol price data including importer margins etc download the Excel file from here. GuessesNZ Treasury this week released their regular monthly overview of the NZ economy and like ourselves notedthat even before the earthquake the domestic part of the economy was turning out to be weaker than theyhad been thinking back when they compiled their previous set of economic forecasts in December. Theynote that farmers are paying down debt rather than spending their rising incomes, that consumers generallyare doing the same, and that demand for labour is weak though income growth is picking up.Treasury make two cost estimates of the earthquake. The first relates to the damage caused by the twoearthquakes They estimate that together the two Christchurch earthquakes have caused $15bn worth ofdamage give or take $5bn made up as residential $9bn, commercial $3bn, and infrastructure $3bn.Rebuilding damaged structures is expected to commence in 2012 and occur over a number of years.Second they estimate that the latest earthquake by itself will cause the economy to grow by 1.5percentage points less than otherwise. That is, before the earthquake they expected the economy in theDecember quarter of this year to be 3.5% bigger than the December quarter of last year. Now they estimatethat the rise will be only 2.0%.Both of these estimates are just that – estimates – and there are plenty of others which need to be made.For instance the government’s revenue will suffer because of the weakening of economic activity. Thecurrent account will shift into surplus for the first time since 1973 because of the money flowing in fromoffshore reinsurance (some $6bn). Unemployment will be higher than otherwise this year. Governmentspending will clearly be higher but at this stage an estimate of the rebuilding cost to the government has yet Page 3
  4. 4. BNZ WEEKLY OVERVIEWto be made. One could say the same for the Christchurch City Council, for Christchurch businesses, and forChristchurch homeowners.Rebuilding from the September 4 event was taking longer than anticipated to start and Treasury, like theReserve Bank, estimate that during the December quarter the economy recorded no growth rather than the0.9% growth they were forecasting just three months ago. They also reckon we will record shrinkage for theMarch quarter.Tractor Regos A Good ProxyDon’t laugh. About once a year we get contacted by someone criticising our use of registration data todescribe what is happening with tractor purchases. It is true that sales and registrations are different thingsbut despite many requests no-one has been able to supply us with a regular timely series of tractor sales.This week someone did so we now have monthly sales data from January 2004. That means we can have aproper look at whether it is valid to look at short term changes in tractor registrations and imply tractor salesare probably doing the same thing. The answer is yes.This first graph shows three month totals for regos and sales. The series move together over a strongseasonal pattern but with the gap between sales and registrations all but gone now. If a farmer can tell uswhy tractors they buy nowadays are usually registered whereas they were not in the past that would behandy. TRACTOR SALES AND REGISTRATIONS 600 3 month 500 Sales 400 300 200 100 Registration s Sources:NZTA, TAMA 0 04 05 06 07 8 9 10 11This second graph consists of our roughly estimated seasonally adjusted rate of change in three monthtractor sales. We have already reported our estimate of a 20% rise in tractor regos over the three months toJanuary. For sales we estimate a 15% rise. The numbers three months earlier were -4% and +5%respectively, and three months before that +4% and +8%. So broadly speaking the series move togethergive or take 5% - 10% differences which given the high volatility in these monthly numbers and the fact weonly tend to highlight the numbers when the changes are large is not a big deal. ESTIMATED THREE MONTH SEASONALLY ADJUSTED CHANGES 30 25 % Tractor registrations 20 15 10 Tractor sales 5 0 -5 -10 -15 Sources:NZTA, TAMA -20 10 F M A M J J A S O N D 11So now we can all get some sleep. One point though, for want of anywhere else to put it – how manyAustralian farmers are going to be looking ahead for the next couple of decades and thinking about thedifficulty of running a profitable export-focussed business in Australia when the AUD will be kept high by Page 4
  5. 5. BNZ WEEKLY OVERVIEWmineral resource prices? Will we see a flow of farmers back to New Zealand on top of the general investorinterest in securing agricultural assets caused by expectations of rising world food demand?In fact there is also another factor in play here which those involved in NZ’s farming sector may want to keepan eye on. In Australia the large supermarket chains have slashed their milk prices to $1 a litre. This is greatfor consumers but the dairy industry is up in arms because in spite of the protestations from thesupermarkets that they are merely loss-leading the expectation is that such terrible discounting of a basicfood item vital to household health will lead to lower prices being paid to Australian dairy farmers. Unlike NZwhere some 90-95% of milk is exported in Australia only 45% is sent offshore. Our Economy Getting Better or Worse?In this simple summary section we look only at what the data are actually telling us and pay no attention to forecasts orintentions measures.This section is proving very useful in picking what is happening out there and it is noteworthy that for thenext wee while the Reserve Bank intend basing their monetary policy decisions on what the data are sayingrather than what may necessarily lie down the track. This week we have learnt that earlier growth in carregistrations has faded so if car registrations are a guide to consumer spending (dubious) then they aresaying new restraint has crept in. We have also seen only a small recovery in dwelling consents issuance inJanuary of just half December’s big 18% seasonally adjusted fall. So house building remains in recessionand the trend is still down. But businesses do appear to be increasing their spending on commercial vehiclesthough earlier growth in tractor registrations has faded away. And though we caution that these data arevolatile, the value of retail Electronic Card Transactions fell only 0.2% in February whereas the earthquakewould have stripped at least 1% off. So lets call retail spending growth flat for now rather than falling.Are householders opening their wallets more?In February there were 11,371 cars registered around New Zealand. And so it starts. We need to wherepossible try and make some adjustment to the data for the February 22 earthquake. Over the previous fiveyears between January and February in Christchurch car registrations have fallen by between 68 and 192averaging 151. This year the decline was 482. That sounds unusually large so there may be a particularregular weekly pattern to regos which we are not aware of. So lets add not 331 back in (482 less 151) butjust 200 and see what the data now say.At 11,571 nationwide car registrations in February were up almost 5% from a year ago and in the threemonths to February compared with the three months to November there was a roughly calculated 1%seasonally adjusted fall in car registrations. Therefore, with the three month number of regos 11% belowaverage for the past six years and a small fall in the past three months whereas the three month change toJanuary was +5% s.a., we can reasonably say that if this statistic reflects what consumers are doing withtheir money it shows easing spending on cars.But just to perhaps make things clearer, if we look only at the North Island then seasonally adjusted carregos were ahead 3.7% from the three months to November whereas the same calculation ending inJanuary showed growth of 6.6%. The recent weakness therefore is largely in the South Island and theconclusion we draw is this. There is mild improvement underway in car registrations but we cannot know towhat extent this is driven by consumers and to what extent by businesses. At least there is growth. For yourguide the South Island rough s.a. change for the past three months was a fall of 11% even with 200 addedback in to the Christchurch total. Page 5
  6. 6. BNZ WEEKLY OVERVIEW CAR REGISTRATIONS CAR REGISTRATIONS 15 260000 % change in three month 10 sum seasonally adjusted 240000 12 month total 220000 5 200000 0 180000 -5 160000 140000 -10 120000 -15 Source:NZTA 100000 Source:NZTA -20 80000 3 4 5 6 7 8 9 10 11 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11With regard to house construction the news remains bad. Although in seasonally adjusted terms the numberof consents issued for the construction of new dwellings improved 9.6% in January this followed an 18.2%fall in December and means that in the three months to January consents were down 2.9% seasonallyadjusted from the three months to October and 14.5% down unadjusted from a year ago. For houses only(no apartments) the three month fall was a large 9.6%. DWELLING CONSENTS ISSUED DWELLING CONSENTS ISSUED 43000 30 Source: Statistics NZ 38000 12 month total 20 10 33000 0 28000 -10 23000 -20 18000 -30 3 mths on previous 3 mths using Source: Statistics NZ seasonally adjusted numbers 13000 -40 74 76 78 80 82 84 86 88 90 92 94 96 98 0 2 4 6 8 10 8 9 10 11The trend in dwelling consent issuance is decidedly downward so one can comfortably say that the sectorremains in recession with the annual number of consents at 15,427 now the lowest since March last yearand not much above the four decade low of 13,616 reached in September 2009. It will be touch and gowhether the annual total hits that level again.This morning we learnt that the value of Electronic Card Transactions in February in seasonally adjustedterms was down only 0.2% from January – or by 0.6% excluding cars and petrol. The 0.2% fall followed a2.4% rise in January and means over the past three months retail spending growth has been a reasonable6.4% annualised. But there is an upward distortion from rising petrol prices and the core measure has grownat an annualised pace of only 0.5% the past three months. ELECTRONIC CARD TRANSACTIONS 14 12 10 ECT Core Retail 8 Average 6 4 2 % s.a. 3 month changes annualised 0 Source : Statistics NZ -2 4 5 6 7 8 9 10 11We think it is reasonable to look at the numbers and conclude that February’s fall was less than it could havebeen given the earthquake, but underlying it all the trend is for flat retail spending growth. Page 6
  7. 7. BNZ WEEKLY OVERVIEWIs business output rising?We have not received any data apart from inward visitors this week but I’m working on a model forestimating spending of tourists so will wait until that is completed before adding tourism again.Are businesses hiring more people?No new evidence this week.Are businesses boosting their capital spending?One piece of information we use to try and answer this question is registrations of commercial vehicles. InFebruary such registrations were 14% ahead of a year ago at 1,737 units. In the three months to Februaryregos were ahead 13.3% from a year ago and seasonally adjusted they were ahead 11% from the threemonths to November. There is underlying growth occurring in this measure of business activity and that isgood. COMMERCIAL VEHICLE REGISTRATIONS COMMERCIAL VEHICLE REGISTRATIONS 20 40000 10 12 month total 35000 0 30000-10 % 3 months change 25000-20 seasonally adjusted 20000 Source:NZTA-30 Source:NZTA-40 15000 3 4 5 6 7 8 9 10 11 98 99 0 1 2 3 4 5 6 7 8 9 10 11In addition, in February there were 137 tractors registered around the country which was a rise of 9% from ayear ago and a seasonally adjusted gain of about 3% in the past three months. We would call that a flatresult. This means that although the sector is coming off its lows the recovery is as we noted last week forwider rises in farmer spending, very mild. There is no justification at this stage for saying farmers arespending up large – not when farm debt between September and January fell by $459mn. Last year over thesame time it fell $162mn, the year before it rose $1.8bn and the year before that in 2007-08 it rose $1.3bn. TRACTOR REGISTRATIONS 40 % change in three months TRACTOR REGISTRATIONS 3500 30 seasonally adjusted 12 month total 20 3000 10 2500 0-10 2000-20 1500-30 Source:NZTA Source:NZTA-40 1000 1 2 3 4 5 6 7 8 9 10 11 98 99 0 1 2 3 4 5 6 7 8 9 10 11This week we learnt that the value of consents issued for the construction of non-residential buildings was$228mn in January. This was practically the same as a year earlier and meant for the year to Januaryconsent values were 14% down from the year to January 2010. Page 7
  8. 8. BNZ WEEKLY OVERVIEW NON-RESIDENTIAL BUILDINGS ALL NON-RESIDENTIAL BUILDINGS 60 5000 50 % change in three month $m annual total value of 40 value of building permits 4500 building consents issued 30 compared with a year earlier 4000 20 10 3500 0 -10 3000 -20 -30 2500 -40 Source: Statistics NZ Source: Statistics NZ -50 2000 2 3 4 5 6 7 8 9 10 11 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11Our interpretation of these numbers is that they show the value of non-residential building consentsflattening out after a period of decline, but that there is no upturn in place. However we have a problem.Other data released during the week in the form of the Building Work Put in Place release show that theseasonally adjusted volume of non-residential construction actually jumped by an unexpectedly large 10.6%in the December quarter. This is the fourth quarterly rise in a row and means activity was 18.8% ahead ofthe December quarter 2009. So should we in fact be writing that this sector is experiencing strong growth? NON-RESIDENTIAL CONSTRUCTION GROWTH 15 10 % quarterly 5 0 -5 -10 % annual average -15 7 8 9 10Actually it has been strong recently, but there is a strange inconsistency at the very right hand side of thefollowing graph between the annual average change in consent values and the same change in actualconstruction. What that says to us is that a lot of work has just been done on something perhaps consentedsome time ago. All we can identify as being unusually strong during the December quarter was constructionof hospitals and nursing homes (ahead 94% from December quarter 2009), and factories and industrialbuildings ahead 49%. 80 BUILDING WORK PUT IN PLACE % annual average growth 60 40 Consent values 20 0 -20 Non-residential Source: Statistics NZ nominal -40 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10We are going to run for now with the theory that some lumpy stuff was caught up on and one must say thatrecently the non-residential construction sector has seen a strong lift in activity from and still to below trendlevels. You can form your own judgement from the above graph as to whether this will continue. We thinknot. Page 8
  9. 9. BNZ WEEKLY OVERVIEWINTEREST RATESGrowth vs. Economic SlackIn a nutshell this is what drives inflation along with institutional arrangements, imported inflation, and exchange rate changes. Ifyou want to forecast monetary policy you need to monitor these things. So we will, adding stuff here when we learn it. Thecurrent common view is rate tightening from September. Have we learnt anything this week which alters this outlook?The growth indicators remain weak and unemployment will rise because of the earthquake and becausesome employers will act on their dented confidence by putting hiring plans on hold. Thus the interaction ofdemand and supply factors says inflation risks have dissipated and hence cutting interest rates this morningwas probably a very easy decision for the Reserve Bank to make. In essence the earthquake has allowedthem to reset monetary policy back at accommodative levels achieved during the global financial crisis andthey now start afresh in their consideration of when to take away the stimulus.Other Inflation InfluencersCourtesy of the troubles in Libya oil prices have risen strongly in recent weeks and NZ petrol prices have hittheir highest levels since late-2008. In some countries such as France they have already reached recordlevels – it al depends upon tax changes (we have extra GST and the Emissions Trading Scheme in place)and exchange rate levels. The Kiwi dollar is above average against the greenback and that is restraining thefeed-through of higher oil prices.High fuel prices will drive extra headline inflation but this is the sort of thing the Reserve Bank will lookthrough and only act on if they see large second-round effects. That is, prices and wages being raised tocompensate for this higher input costs. With the labour market still loose we think the ability of wage earnersto gain such compensation will be limited therefore do not believe the Reserve Bank will for now be all thatworried about the inflationary impact of the oil price rises. But they will monitor the situation closely and inparticular keep a close eye on inflation expectation measures.Rate Movements This WeekConfirmation by the Reserve Bank of a 0.5% cut in the official in the official cash rate to 2.5% has seen 90-day bank bill yields fall to 2.67% from 2.89% last week and 3.22% three weeks ago. One year swap rateshave fallen to near 2.77% from 2.91% last week and 3.38% three weeks ago. The five year swap rate hasfallen to 4.4% from 4.45% last week and 4.77% three weeks ago. These rate declines may be just about itfor this rally as we feel the Reserve Bank would be very reluctant to cut the cash rate again, especially asfiguring out what is really happening in the economy over the next few months will be quite difficult. 90 DAY BANK BILL YIELDS ONE YEAR SWAP RATE 6.5 4.5 % 6 % 4.3 5.5 4.1 3.9 5 3.7 4.5 3.5 4 3.3 3.5 3.1 2.9 3 2010 2009 2011 2.7 2.5 2.5 2-Jan 30-Jan 2-Mar 30-Mar 29-Apr 24-Jun 19-Aug 16-Sep 12-Jan 9-Feb 9-Mar 3-Jun 26-Aug 23-Sep 17-Jan 14-Feb 27-May 22-Jul 11-Nov 1-Jul 29-Jul 14-Oct 9-Dec 6-May 18-Nov 16-Dec 21-Oct 8-Apr 2 3 4 /4 /5 /6 /7 /8 15 /9 12 0 10 1 7/ 12 2 3 /3 /4 /5 /6 /7 /8 14 /9 11 0 1 6/ 12 2 3 09 10 11 5/ 5/ 2/ 4/ 4/ 3/ 3/ /1 /1 /1 /1 30 28 25 23 20 17 31 29 27 24 22 19 16 1/ / 1/ 9/ 1/ 8/ Page 9
  10. 10. BNZ WEEKLY OVERVIEW FIVE YEAR SWAP RATE 6 % 5.5 5 4.5 4 2009 2010 3.5 2 3 /3 09 2 3 4 /4 /5 /6 /7 /8 15 /9 12 0 10 1 7/ 12 10 /4 /5 /6 /7 /8 14 /9 11 0 1 6/ 12 11 2 3 /1 /1 4/ 4/ 5/ 5/ 2/ /1 /1 3/ 3/ 30 28 25 23 20 17 31 29 27 24 22 19 16 / 1/ 1/ 9/ 1/ 8/ FINANCIAL MARKETS DATA This Week 4 wks 3 months Yr 10 yr week ago ago ago ago average Official Cash Rate 2.50% 3.00 3.00 3.00 2.50 5.9 90-day bank bill 2.67% 2.89 3.21 3.20 2.70 6.2 1 year swap 2.77% 2.91 3.43 3.47 3.48 6.3 5 year swap 4.40% 4.45 4.76 4.79 5.24 6.6 180-day term depo 3.85%* 3.85 4.10 4.10 4.90 6.0 Five year term depo 6.00% 6.00 6.50 6.50 6.75 6.5 * 160 days = 5.2%If I Were a Borrower What Would I Do?Stay floating BUT. There is a level of fixed interest rates at which I would sacrifice a four decade low floatingrate in order to lock in rate certainty. In addition there is a point when if fixing was my goal I would jump fromfloating into fixed because fixed rates were about to rise. With regard to this latter point the following factorsare in play.• Global inflation is rising with increasing concerns that the US Federal Reserve is risking too much inflation next year in order to try and underpin economic growth this year and the outcome will be a 1994-like selloff in medium to long term interest rate products in expectation of something approaching the 3% rise in the Federal funds rate which happened back then.• The cut we have just seen here in New Zealand may mean extra rapid tightening next year once the rebuilding of Christchurch hits full speed.• Global commodity prices are rising on the back not just of loose monetary policies but structurally higher demand out of emerging economies. This means rapidly rising input costs in NZ with timber prices for instance just increasing 25%.I would float now and only fix two years at a rate 6.0% or better or three years at a rate 6.25% or better. 7.5 Columns = Forecast Current fixed rates average 7 floating rate cost 6.5 6 5.5 % 5 1 2 Years 3 Page 10
  11. 11. BNZ WEEKLY OVERVIEW CURRENT VERSUS AVERAGE MORTGAGE INTEREST RATES HOUSING TOTAL MONEY FLOATING RATE 8.5 11.5 % 8.1 8.0 7.9 8.0 % 8.0 7.8 Interpolated pre-2007 7.6 7.6 10.5 7.5 9.5 7.0 Current interest rates 8.5 6.5 6.0 7.5 Average rates past eight years. 5.5 6.5 5.0 1998 2000 2002 2004 2006 2008 Total 1 year 2 year 3 year 4 year 5 year 7 years 5.5 Money 98 12/2 27/4 11/5 10/5 8/5 6/5 2/5 4/5 3/5 1/5 30/4 29/4 HOUSING 2 YEAR FIXED MORTGAGE RATE HOUSING 5 YEAR FIXED MORTGAGE RATE 10.5 10 % % 10 9.5 9.5 9 9 8.5 8.5 8 8 7.5 7.5 7 7 6.5 6.5 6 6 1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008 5.5 5.5 98 12/2 27/4 11/5 10/5 8/5 6/5 2/5 4/5 3/5 1/5 30/4 29/4 98 12/2 27/4 11/5 10/5 8/5 6/5 2/5 4/5 3/5 1/5 30/4 29/4If I Were a Term Deposit Investor What Would I Do?Make the best of the situation given that low interest rates will be here for at least all of this year andpossibly well into 2012. Then if they do jump up at some point in 2012 it will be because inflation isaccelerating and that means in real terms I may not be better off. The inflation element globally is veryuncertain at the moment with plenty of analysts predicting a major surge from a combination of continuedmoney printing n the United States, money printing in emerging countries to stop their currenciesappreciating against the USD, weather events pushing up food prices, underlying structural growth indemand as well as speculative pressures plus events such as what is happening in Libya.Still, with so much uncertainty around the world having a good stack of funds in what appear to be quite safeterm deposits feels good. 180 DAY TERM DEPOSIT FIVE YEAR TERM DEPOSIT RATE10.00 9.00 RATE 9.00 8.50 8.00 8.00 7.00 7.50 6.00 7.00 5.00 6.50 4.00 % 6.00 % 3.00 5.50 2.00 5.00 1.00 Source:BNZ 4.50 Source:BNZ 0.00 4.00 96 97 98 99 00 01 02 03 04 05 06 07 8 9 10 11 96 97 98 99 00 01 02 03 04 05 06 07 8 9 10 11 Page 11
  12. 12. BNZ WEEKLY OVERVIEWHOUSING MARKET UPDATETurnover is weak, construction falling, and prices essentially flat on average.Housing ShortageA few weeks ago we discussed research by the Department of Building and Housing into the number ofdwellings needing to be built each year to handle population growth and we concluded that at the start of thisyear there was a fundamental shortage of about 28,000 dwellings. Now we have an estimate that 10,000houses in Christchurch may be torn down as a result of the latest earthquake. That means our starting pointnow is a shortage of 38,000 dwellings. Actually it will be more than that because of the estimated 100,000houses in Christchurch needing repairs many will be uninhabitable for quite some time.This does not of course mean that all of a sudden house prices are going to surge as people will clearlydouble up for a while, holiday homes and motels will be occupied and so on. But over the longer term asreconstruction of houses is constrained by a shortage of resources there will be a price impact regardless ofwhat the various housing affordability measures are showing.It pays to remember that affordability measures give no insight into where prices for houses are likely to goon average. If they did then we would not see average prices deviate from what some measure deems to bean affordable level. If deviation occurs and the extent of over or under valuation reaches for instance 10%that does not imply prices will fall 10% or hold still while incomes change. It could be that the valuationmeasure is on its way to being 20% away from trend, or 40%. So be careful when looking at any fair valuemeasures for not just houses but shares, exchange rates and so on. If they worked as it were in predictingprice movements deviations from mean would not occur in the first place.Or looked at another way, have any of these valuation measures yielded useful forecasts of prices movingfurther away from fair value in the first place? Anyway, at least they do allow international comparisons to bemade which are actually quite important for us Kiwis because we are so internationally mobile. On averageover the past ten years we have had 1.7% of our population leave the country per annum and a flowequivalent to 2.1% arrive. Our population churns rapidly and that creates a housing market dynamic we mustalways keep near the front of our minds. If net migration flows turn quickly to the downside because of theearthquake then housing market pressure will be quickly relieved to some extent. We will get a feel for thiseffect in coming months and the risk is the net inflow becomes very low especially because of the increasingattractiveness of shifting to Australia.This is an email we received this week relevant to building costs.“You may want to factor this into your inflation/housing calculations. As a timber manufacturer who exports95% of production we are now facing a 25% increase in the price we pay for logs from 1/4/11.(54% increaseon a year ago). The excuse given is that this is what China will pay. When the building industry does restartagain the cost of lumber may be a shock to many. This is of course if there are any timber manufacturersleft. We could however import the timber.”Just for your guide, there is as yet no evidence that spiralling timber prices are causing a fall-off in timberexports. Export receipts from timber exports were 7% higher in the three months to January compared with ayear earlier. The first graph shows the 12 month running total of timber exports. The second graph showsthat there is evidence of rising imports but this comes after an unusually weak period and the long term trendis upward anyway. So one cannot yet run an argument that sharply rising log prices are causing a shift in NZtimber movements from exports to imports. The thing to remember is that log input prices to the timberprocess will be rising offshore as well as here, so substitution from domestic timber to imported timber isunlikely to happen to any major degree. Page 12
  13. 13. BNZ WEEKLY OVERVIEW SAWN WOOD EXPORTS SAWN WOOD IMPORTS 1,000,000,000.00 70,000,000.00 900,000,000.00 $ 12 months $ 12 months 60,000,000.00 800,000,000.00 700,000,000.00 50,000,000.00 600,000,000.00 40,000,000.00 500,000,000.00 30,000,000.00 400,000,000.00 300,000,000.00 20,000,000.00 200,000,000.00 10,000,000.00 100,000,000.00 Source:Statistics Source:Statistics NZ NZ - - 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 89 90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11Are You Seeing Something We Are Not?If so, email us at with Housing Comment in the Subject line and let us know.Key Forecasts• Dwelling consent numbers to improve further out. House prices edging higher from second half of 2011. Page 13
  14. 14. BNZ WEEKLY OVERVIEWMAJOR OFFSHORE ISSUESThere are many important things happening offshore not easily covered in the one country commentaries we have traditionallyincluded when time permitted in the FX section below. So this new section will concentrate solely on developments in theareas occupying the minds of the markets, policy makers and politicians around the world. In some weeks certain sections willbe empty because nothing new will have occurred.European DebtSouthern Euro-zone governments have soaring debts and/or deficits due to taking on their private sector’s debts, or simplytheir own fiscal incompetence. Concerned by these developments and the lack of suitable EU-wide institutions for handlingcrises investors are demanding higher and higher interest rates before investing in more debt, causing debt servicing budgetblowouts for the recalcitrant borrowers. To try and keep investor confidence some governments are radically slashingspending, raising taxes and restructuring but still borrowing costs climb and the citizenry grow increasingly restless. The logicalroute is they restructure their debt but that can’t happen yet because the bulk of such debt is held by French and Germanbanks and the capital losses could send them bankrupt thus crushing their own economies. What happens then? Lots moreinvestor worries, more official bailout packages as already done for Ireland and Greece, more fiscal austerity and rioting, thenwhen bank capital bases are secure enough debt restructuring will almost certainly come for Ireland, Greece, Portugal andmaybe Italy and Spain.What’s new?Last week the ECB President Mr. Trichet said “An increase of interest rates in the next meeting is possible.”Meaning that in April it is likely the ECB cash rate will be increased 0.25% to 1%, the first increase since July2008 when the rate eventually peaked at 4.25%. The rate rise will prove problematic for highly indebtedcountries like Ireland, Greece, Portugal and Spain which are struggling to manage their debt burdens whileenacting reforms aimed at getting (some) inefficiencies out of their economies – and at the same time tryingto badger the Germans into artificially lowering the interest rates they are being charged for their bailoutfunds (Ireland and Greece only).Speaking of Greece, this week the largely inevitable happened with Moody’s cutting their credit rating bythree notches to B1 from Ba1 citing default risk because of lax tax collection, the risk that reforms are notimplemented, and rising risk of losses to private investors because of German demands for such. Thepremium investors now demand for holding Greek bonds has jumped to over 9% above German bond yieldswhich is the highest such spread since the second week of January.Portugal is also having to pay more for its funds with a bond auction overnight poorly bid and yields at recordhighs.The prize for disappointing news of the week must surely go to European bank regulators who have decidedthat the next round of bank stress tests will still not include a default event. That is they are not going torequire banks to model the impact on their balance sheets of the likes of Greece, Ireland, Portugal or Spaindefaulting on their debt. Their concern is that modeling a default will imply they expect one to happen.Worse than that, regulators in individual countries will be able to use their own particular definitions for thestress tests. The last time these stress tests were run all banks got pass marks and some then went on torequire bailouts. The results come out in June and it seems unlikely given the weak nature of the tests thatconcerns about the financial soundness of banks in Europe will finally be laid to rest.Still, in Germany economic growth prospects remain firm with industrial output rising by a strong 1.8% inJanuary. Page 14
  15. 15. BNZ WEEKLY OVERVIEWChinese InflationIn China high inflation tends to spur non-one party thoughts from the populace à la Tiananmen Square 1989 therefore theleaders will do all they can to get food price rises in particular down. So is inflation easing, what measures will be added to getinflation down? The big global worry is that these measures could produce a sharp slowing in growth which slamssharemarkets, Chinese raw material demand and therefore commodity prices relevant especially for Australia and via them tous, plus our own large dairy and forest product exports to China.What’s new?No time to fill this section this week.US Growth MomentumThe US economy has grown 2.2% over the past year but the upturn is not yet “self-sustaining” or reducing unemploymentstuck near 9% at 14mn - worse than Germany, Japan, Britain and Russia. Manufacturing is firm but retailing, housing andbusiness investment remain weak while few moves have yet been started to rein in an unsustainable Federal Budget deficitabove 11% of GDP and concerns are growing about state and local budgets. What we’re looking for are signs that theeconomy is firing on more cylinders than just those caused by a low USD, restocking, and fiscal stimuli. I.E. consumption,housing, and business capital spending.What’s new?The monthly non-farm payrolls report came in about at expectations. There were 192,000 net new jobscreated in February and previous months’ gains were revised slightly higher to reach 63,000 from theprevious 32,000. The result is largely being interpreted in a positive light but realistically it still shows alabour market only just getting onto its feet. Given that January was affected by snow storms which impactedhiring and February recorded a bounce back from that effect it is best to average the two months to get afeel for what is happening. Doing that one gets growth averaging 128,000 which is better than the averagefor all of 2010 of 78,000 a month and in particular is better than the average for the last six months of 2010which was just 47,000. So the result looks okay but is still well below the 300,000 level generally acceptedas needed in order to stop the stock of unemployed from rising. US - NON-FARM PAYROLLS 600000 12 Unemployment rate 400000 RHS 10 200000 8 0 -200000 6 -400000 4 -600000 2 -800000 Monthly jobs growth LHS Source: US Dept. of Labour -1000000 0 06 07 8 9 10 11The unemployment rate actually fell to 8.9% from 9% in January and a peak of 10.1% in October 2009. Butthis fall reflects people leaving the workforce probably disappointed at their prospects of finding a job.Still overall the result is okay and allows one to hope that hits which will come this year from states and localauthorities struggling to manage their finances and oil prices rising will by offset enough to allow consumerspending to record improving growth. Page 15