New Zealand Retail Sales Starts The RBNZ Countdown

How Will The Markets React?

Only a few weeks ago the Reserve Bank of New Zealand raised the nation’s overnight lending rate by 25 basis points to a record 7.50 percent. Under normal circumstances, this would immediately dampen expectations of further tightening while the monetary authority monitors the effects on the economy. However, New Zealand is not the usual case. In a statement following the announcement of, RBNZ Governor Alan Bollard made sure to telegraph his intentions to stay on the inflation war path. Bollard left the door for future rate hikes wide open – saying the only relief for inflation (and his hawkish outlook) was through a cooling of the booming housing market and domestic spending. Coincidently or not, the economic calendar for the next two weeks clearly paves the way for the next interest rate deliberation on April 25th and 26th with a spending indicator out tomorrow and housing and inflation numbers due next week. For tomorrow’s report, economists are predicting the retail sales indicator to print a 0.5 percent rise. If the forecasts are correct, this would match the pace from the previous two months. According to the complimentary data available, the market’s consensus seems well founded. On the one hand, consumers had to deal with steadily rising energy prices through February and consistently high lending rates. At the same time, the unemployment rate through the end of 2006 dropped to 3.7 percent while wage growth through the entire year accelerated by a record 3.2 percent. More timely in its support, a gauge of transactions made with credit and debit cards (accounting for more than 50 percent of total retail spending) rose 1.6 percent for the same period. Should the government’s retail sales indicator hit the wires with a considerable surprise, speculation over an impending rate hike could soar, weighing on equities and sending the kiwi and government bond yields soaring.

Bonds –10-Year New Zealand Government Bond Yields

Yields on ten-year New Zealand government bonds have consolidated in the past few weeks as economic indicators cooled hawkish sentiment after the central bank’s decision to hike the benchmark lending rate. However, congestion may finally be shed as traders look ahead to a series of reports that may very well push policy officials to yet another interest rate hike. To start things off, tomorrow’s retail sales report will measure consumer spending – one of RBNZ Governor Bollard’s top concerns for policy making. Whether or not a third 0.5 percent monthly increase in sales will incite rampant speculation of another rate hike this month remains to be seen. On the other hand, a better-than-expected print could easily raise the stakes and send yields on the 10-year bond through 5.950.





FX – AUD/NZD

The AUDNZD cross has held in a region of frustrating congestion between 1.1250 - 1.1375 over the past few weeks and nears the apex of a symmetrical triangle, signaling major breakout potential. However, the high-yielding currencies have both been appreciating significantly as risk-seeking traders indulge in the carry. A single look at the Aussie and Kiwi against the US dollar and the Japanese Yen look nearly identical. However, the release of economic data out of New Zealand could bring the AUDNZD components to decouple, as interest rates on the Kiwi side are still a solid 150 basis points higher than on the Aussie side. Retail sales for the month of February are estimated to rise 0.5 percent once again, and a reading at or above expectations could bring speculation of another rate hike by the Reserve Bank of New Zealand to jump, as the central bank will be eager to cool resilient consumption. On the other hand, a more tepid retail sales report would indicate that the RBNZ’s past policy actions have started to make an impact, and with another round of policy tightening expected from the Reserve Bank of the Australia within the next few months, AUDNZD could make its break to the upside.





Equities – NZX 50 FF Gross Index

New Zealand equities edged back during the last trading session as a lack of liquidity allowed shares to fall lower. Indeed, analysts speculated that few headline stocks looked cheap with blue chip power company Contact Energy down 2.1 percent to NZ$9.08 after its recent run up, sending the NZX-50 Index down 0.8 percent to 4,147.36. Exporters were also under pressure after the New Zealand dollar tested fresh 22-month highs against the US dollar, making products out of the country increasingly expensive. Fisher & Paykel Healthcare and Fisher & Paykel Appliances, which generate much of their revenue in US dollars, closed down 1.4 percent at NZ$3.66 and 0.3 percent at NZ$3.69, respectively.

Should liquidity conditions remain thin, New Zealand equity markets could be in for further declines. Furthermore, the release of retail sales for the country could accelerate the NZX-50 Index’s trek lower, as the figure is anticipated to rise 0.5 percent once again in February. If sales hit the tape at or above expectations, speculation of another rate hike by the Reserve Bank of New Zealand could jump, as the central bank will be eager to cool resilient consumption. With a benchmark of 7.50 percent – well above that of other developed countries – another round of monetary policy tightening would not only raise already-hefty borrowing costs for businesses in New Zealand, but it was also send the national currency surging higher, hurting exporters even more. On the other hand, a more tepid retail sales report would indicate that the RBNZ’s past policy actions have started to make an impact, and could restore confidence amongst equity traders that upside potential for interest rates is limited.