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MARKETS OUTLOOK RESEARCH

2 September 2019

Page 1

Signs of Domestic Demand Weakness?

• Terms of trade robust but import volumes not • Building/wholesale data next to test Q2 GDP view • Commodity export prices coming off a bit now • But falling NZD offsetting the blow (as usual) • Rate falls put house prices back on the radar • Finance Minister Robertson speaking Tuesday While our official forecasts have GDP growth continuing to run near trend, we are sensing more and more downside risk around this view. With respect to Q2 GDP, we presently anticipate a 0.5% expansion. However, there are some key GDP “partials” this week (and early next) to further test this out.

One is already at hand, with this morning’s June quarter Overseas Trade Indexes (OTI). They came in broadly as we expected…except for the greater weakness in import volumes than we imagined. Their 3.5% drop was not sheeted to lumpy items. The slippage pervaded the core categories of plant and machinery (ex-transport goods), industrial supplies (ex-oil) and consumption goods (ex-cars and fuel).

This piques our concern about how economic activity was travelling in Q2, and crucially with respect to domestic demand. However, broadly speaking, today’s OTI data left our expenditure GDP growth broadly unchanged, at 0.4%.

Yes, there was a 2.6% drop in the OTI export volume measure for Q2. But this is about what we expected, after its big lift in Q1. This has had more to do with timings around rural production than other types of manufactured goods. And even with their correction in Q2, export volumes posted annual growth of 3.5%, which is not too bad in the current climate.

Regarding the merchandise terms of trade, these were almost exactly as we expected. Overall, they increased 1.6%. This was from export prices (+3.4%) outpacing import prices (+1.8%). While this is probably near the a top in the terms of trade, even a gentle moderation from here (as we expect) would still have them at relatively high levels, from a long-term perspective.

With respect to Thursday’s June quarter Building Work Put in Place (BWPIP) we anticipate a flat outcome in terms of volume. It might even be a bit down, after the outsized increase it posted for Q1.

Robust

Either way, we wouldn’t rush to read a downturn into the Q2 BWPIP figures. Not with building consents having ramped backed up as much as they have over the last 3-6 months (with annual new dwelling consents tracking their highest since the massive building boom of the mid 1970s). Having said this, the construction industry’s outlook into 2020 has turned negative as per the ANZ business survey (although it’s not nearly as negative as it was earlier in this year).

Friday’s Wholesale Trade report is the other GDP indicator due this week. For this we anticipate a value gain in the order of 0.9%, seasonally adjusted. This would infer a volume increase a bit better than the 0.2% increase logged for Q2 Retail Trade (and with similar weightings in the production GDP accounts).

Weakness In Perspective

750

850

950

1050

1150

1250

1350

1450

1550

1650

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Index

Quarterly

NZ Terms of Trade - OTI Goods

Source: Statistics NZ, BNZ

Terms of trade

Export prices

Import prices

-20

-15

-10

-5

0

5

10

15

20

25

96 98 00 02 04 06 08 10 12 14 16 18

Annual % change

Quarterly

OTI Merchandise Trade Volumes

Source: Statistics NZ, BNZ

Exports

Imports

Markets Outlook

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2 September 2019

Page 2

So, by the end of this week we’ll have a better idea on Q2 GDP growth, albeit with a lot still resting on next Monday’s June quarter manufacturing figures to finalise things. The latter is another area of the economy making us wonder how well growth is holding up, or not (with reference to the slow PMI readings through the June quarter).

Moving on from Q2 GDP, there will be some commodity price updates this week also.

For Wednesday’s dairy auction we are looking for a flat, to slightly down, outcome on the GDT-weighted price index. While global supply remains relatively tight, there are a fair few demand-side bogeys out there as well at the moment.

We think slight slippage will be writ in August’s ANZ commodity price indices (also due Wednesday). Well at least in world price terms, with all the main component prices having taken a dip during the month, by the look of it.

However, converted into local currency there will probably be a moderate gain in August’s export prices. This is courtesy of the softer trade-weighted exchange rate through the month. In this, the currency is doing its time-honoured job of buffering the economy. This is an aspect of monetary easing that should not be lost sight off, while all the focus is hogged by interest rates, and how very low they can go.

Buffered

With this in mind, the housing market is also an area to keep tabs on over the next while, as buyers start to come out of winter. And they will be going into spring/summer armed with mortgage rates that have now slumped even further.

The Quotable Value NZ housing report for August is due for release early Wednesday morning. We also expect to see the Barfoot and Thompson report before the week is out, as more of a real-time data pulse on the Auckland market. We wouldn’t be surprised to see this firming up a little.

Finally, note that New Zealand’s Minister of Finance, The Honourable Grant Robertson, will be talking tomorrow afternoon. It’s at a Bloomberg-hosted event in Auckland, where he will “give his insights on the economic outlook and the raft of reforms the government is making to New Zealand’s financial architecture”. This is due to start around 3:30pm (NZT).

To the extent things drift onto the topic of fiscal stimulus, Robertson’s address (and Q&A?) will be all the more interesting. There are certainly increased calls for the government to spend more. Of course, this might test the government’s still-in-place net-debt target of 20% of GDP by 2021/22 – that, along with the broadly slowing economy.

Poised (For Another Upleg?)

craig_ebert@bnz.co.nz

100

120

140

160

180

200

220

240

260

280

300

320

340

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Index

MonthlySource: ANZ, BNZ

NZ dollarprices

World prices

ANZ Commodity Export Prices

-10

-5

0

5

10

15

20

25

30

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

B&T Average Home (Sale) Prices

Barfoot Average

Source: Barfoot and Thompson, BNZ Monthly

Annual% change

Markets Outlook

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2 September 2019

Page 3

Global Watch

• US, China, EU PMIs expected to remain subdued

• US payrolls solidity should remain

• RBA expected to hold cash rate at 1.0%; retain easing bias

• AU GDP, retail sales weakness expected

• AU first current account surplus since 1975 anticipated

• Canadian Q2 GDP seen solid; BoC on hold

Australia

Q2 GDP Expected To Disappoint The RBA

NAB Forecasts Weak Retail Sales

Australia – RBA easing bias, weak GDP and retail sales, mixed partials

The Reserve Bank meets on Tuesday and should keep the cash rate unchanged at 1%, while retaining a clear easing bias given global and domestic risks (consensus: 1%; market pricing 0.98%).

The clear easing bias was already present in the marked shift in tone in the minutes of the August rate decision, which emphasised that “having eased monetary policy at the previous two meetings, the Board judged it appropriate to assess developments in the global and domestic economies … [and] would consider a further easing of monetary policy if the accumulation of additional evidence suggested this was needed”.

Global risks have increased over the past fortnight, mainly reflecting the escalation of the US-China trade war. Since the last Board meeting, US President Trump has demanded US firms leave China and announced higher tariffs on Chinese imports (tariffs on $US250b of Chinese imports rise from 25% to 30% on 1 October, while tariffs on a further $US300b of Chinese goods rise from 10% to 15% by 15 December).

Domestically, partial indicators suggest that GDP growth will again disappoint the Reserve Bank, likely leading to a further downgrade to the outlook in the November Statement on Monetary Policy. We currently estimate GDP grew by 0.5% in Q2 with a slight downside risk to this forecast, while the bank had forecast a 0.8% increase. Recent data show that residential construction is falling at a much faster rate than the bank had expected, while business investment also seems to have disappointed.

Another domestic issue for the bank is fiscal policy. The income tax cuts that started in July may have masked an underlying deterioration in retail spending and the government is still reluctant to deliver an additional fiscal stimulus.

Official retail sales are due out the morning of the Tuesday Board meeting, but are likely to be weak given that NAB’s Cashless Retail Sales Index was barely changed in the month. This is disappointing considering tax refunds started flowing in July at a greater volume than in 2018.

For example, 1.6 million Australians had lodged their tax return by mid July, more than double the lodgements of a year ago. By mid August, 4 million returns were lodged and the ATO had paid $10b in tax refunds, $2b more than the same time last year. The ATO notes that most returns are processed in less than 2 weeks, with payments made in 2-3 days.

The experience of the global financial crisis suggests that there should be a sizeable and relatively immediate boost to spending from the tax refunds (e.g. retail sales spiked by 3.8% in December 2008 on the back of handouts that month). As an upper bound to the potential impact, if half the $2b of extra refunds delivered by mid August was entirely spent on retail goods, it would boost spending by about 3.6%.

Accordingly, if retail sales barely grow in line with the NAB series in July, then this would likely indicate that the underlying trend in sales deteriorated in the month. Another possible alternative is that households largely saved the refunds, using the money to repay debt.

In either case, a poor result for retail sales in July would be a concern for the Reserve Bank as it would raise doubt over the boost to GDP from the tax cuts once all the refunds are paid.

Markets Outlook

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2 September 2019

Page 4

Average US Tariff Rate On Chinese Goods Has Risen

Business indicators should be mixed (Monday). Inventories are difficult to forecast, but we expect a 0.1% decline, subtracting 0.1pp from GDP (mkt: +0.3 ppt). We estimate company profits grew by 6% in Q2 (mkt: +2%). This is driven by a sharp 16% commodity-driven increase in mining profits, with non-mining profits expected to decline again by 0.7% as construction and retail profits fall further.

A Rise In Mining Profits Is Expected

Net exports likely made a strong contribution to Q2 GDP (Tuesday). Net exports are expected to add a strong 0.5ppt to Q2 GDP (mkt: +0.3 ppt), reflecting a 1.1% increase to exports and a modest 0.6% decline in imports. This follows a 0.2pp contribution in Q1.

The current account should post the first surplus since 1975 (Tuesday). The current account should post a surplus of $2.5b (mkt: $1.5b), as a large improvement in the trade surplus to $19.7b offsets the net income deficit.

Public demand should be strong (Tuesday). Government spending has been a key support for activity in the past year and we think that public demand remained strong in Q2, with consumption up 0.8% and investment rising by 2%.

Recent partial indicators point to weak Q2 GDP. Ahead of key data on Monday and Tuesday, we expect a 0.5% rise in GDP (mkt: 0.5%; RBA: 0.8%), with slight downside risk. This would put annual growth at 1.4%. Recent partial data have generally been weak: (1) retail volumes, which makes up around 30% of consumer spending, rose by only 0.2% in Q2 (this equates to broadly no contribution to GDP); (2) residential investment fell by 5% (-0.2 ppt); and (3) we estimate that business investment fell by 1% as a 4% decline in non-residential construction offset a 2.5% rise in equipment (-0.1 ppt).

A new record trade surplus (Thursday). We expect the trade surplus rose by $0.8b to $8.8b in July reflecting ongoing commodity price strength and the final ramp up of LNG exports.

The budget may be broadly back in balance (no set release date). Strong commodity prices have provided a sizable boost to the government’s budget. The AFR reports that the Treasurer may announce the final budget outcome for 2018-19 in “early September”, delivering a “balanced” budget, which we think equates to a small surplus (the budget over the 11 months to May was a deficit of $0.1b).

China

The Caixin PMIs are due Monday/Wednesday. Chinese negotiators are expected to be in the US in September, although no scheduled date is available. We continue to expect no near-term resolution.

US

The August manufacturing ISM on Tuesday should show still-soggy activity, although the non-manufacturing ISM on Thursday may continue to hold up. Analysts expect another solid payrolls report on Friday.

EU

PMIs may stabilise in September, but there is an increasing headwind from the escalating US-China trade war (flash readings for France showed marked improvement, but German manufacturing continues to contract). There may be some pre-positioning ahead of the following week’s ECB meeting that is expected to deliver a comprehensive easing package that weighs on the EUR and yields.

Markets Outlook

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2 September 2019

Page 5

UK

PM Johnson’s audacious decision to suspend parliament from 9 September for five weeks has set the scene for numerous challenges. Opposition MPs will attempt to move legislation that will aim to extend Article 50 past 31 October. We might also see an opposition-led confidence vote on Johnson’s government.

Canada

The market expects the BoC to remain on hold at 1.75% on Wednesday, seeking direction from the accompanying statement and the deputy governor’s speech on Thursday. Q2 GDP should show annualised growth of 3%, supporting unchanged rates.

kaixin.owyong@nab.com.au

Markets Outlook

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2 September 2019

Page 6

Fixed Interest Market Reuters: BNZL, BNZM Bloomberg:BNZ

NZ rates have continued to grind lower against a backdrop of continued trade tensions and very low levels of global bond yields. The 2 year swap rate reached a fresh all-time low of 0.9% this morning with terminal cash rate pricing closing in on 0.5% (in mid-2020).

In terms of developments last week, the ANZ Business survey remained at subdued levels (weakest headline confidence since 2008 and Own Activity since 2009) and consistent with sub-trend growth in NZ. Notably, the 2 year-ahead inflation expectations series dipped down to 1.7% (from 1.81%). RBNZ Governor Orr and Assistant Governor Hawkesby have emphasised the importance of lifting inflation expectations recently, and the fall in the RBNZ’s inflation expectations measure was one reason cited for the larger-than-usual 50bp OCR cut last month. A September OCR cut is priced at around a 20% chance.

Offshore it was a relatively quiet week data-wise, with the market’s focus still squarely on the ongoing trade conflict between the US and China. China suggested it wouldn’t retaliate to the latest announcement on tariffs from Trump (where existing tariffs would be upped from 25% to 30% and new tariffs from 10% to 15%). US and global long-term rates traded broadly sideways last week. Until there is some sign of de-escalation in the trade dispute, or a meaningful shift towards fiscal policy, it’s difficult to see global yields heading sustainably higher any time soon.

It’s a busier week ahead data-wise, offshore at least, with the ISM surveys and non-farm payrolls released in the US. Given the trade war backdrop and growing chatter about the risk of a US recession, the market is likely to be more sensitive to misses on the downside. In Australia, our NAB colleagues look for a 0.5% increase in Q2 GDP, in-line with the consensus (but below the RBA’s 0.8% forecast). They expect the RBA will ultimately downgrade its growth outlook, paving the way for another rate cut, to 0.75%, in November. Beyond that, they see a risk of further easing and/or a shift towards unconventional policy in 2020. For its meeting this week, the market prices just a 13% chance of a rate cut.

NZ rates (both short and long term) have been highly correlated with those in Australia and the US this year, and any possible extension of rate cut expectations offshore will likely flow through to NZ. Governor Orr mentioned the global re-pricing of central bank policy rate expectations earlier this year as a key factor in the RBNZ’s decision to cut the OCR by 50bps in August.

How far could NZ long-term rates fall if the RBNZ kept cutting the OCR? While it might seem obvious, we think that depends on what global long-term rates do (i.e. the

global context for any possible future easing). On that front, we released a note last week looking at the supply-demand outlook for NZGBs. Foreign investors have been net sellers of NZGBs for three years now, consistent with the decline in NZ’s yield spread to key offshore markets. Over the coming year, there will be positive net supply of NZGBs for the first time in four years and, if foreign investors continue to reduce holdings at the same pace they have done recently, it will require a substantial increase in domestic demand.

We’re not convinced that long-dated NZGB yields will necessarily decline too far if the OCR were cut to zero, or even below, unless the rest of the world was going in that direction too. In this scenario, there would doubtless be some domestic investors who stretch down the yield curve to avoid near zero, or negative yields, at the front-end. But unless the NZD also depreciated sharply, we would expect an exodus of foreign investors to outweigh that domestic long-end demand (in turn constraining the decline in long-term rates). But if global central banks continue easing policy and the global bond rally keeps going, then NZGB yields will likely continue to head even lower.

All-time lows for 2 year swap as terminal OCR falls to 0.5%

Current Rates/Spreads and Recent Ranges

nick.smyth@bnz.co.nz

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

2 year swap

Source: BNZ, Bloomberg

2y swap vs. year-ahead OCR expectations %

Year-ahead OCR expectations, RHS

%

Current Rates/Spreads and Recent Ranges

Current Last 3 -weeks range*

NZ 90d bank bills (%) 1.19 1.17 - 1.21

NZ 2yr swap (%) 0.90 0.90 - 0.99

NZ 5yr swap (%) 0.93 0.91 - 1.02

NZ 10yr swap (%) 1.19 1.16 - 1.31

2s10s swap curve (bps) 29 26 - 33

NZ 10yr swap-govt (bps) 13 13 - 21

NZ 10yr govt (%) 1.06 0.98 - 1.13

US 10yr govt (%) 1.50 1.44 - 1.72

NZ-US 10yr (bps) -44 -60 - -40

NZ-AU 2yr swap (bps) 17 17 - 29

NZ-AU 10yr govt (bps) 17 12 - 19

*Indicative range over last 3 weeks

Markets Outlook

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2 September 2019

Page 7

Foreign Exchange Market Reuters pg BNZWFWDS Bloomberg pg BNZ9

The NZD fell for the sixth consecutive week and made a fresh four-year low of 0.6283 in the process. This reflected a combination of USD strength – with USD indices such as DXY and BBDXY both reaching multi-year highs – and independent NZD weakness.

It was a tumultuous start to last week, with markets digesting Trump’s official tariff response to China last weekend and his claim that the International Economic Emergency Act gave him the authority to declare a national emergency, so as to make it more difficult for US businesses to operate in China. The NZD and yuan opened the week on a soft note and the PBOC made full use of its “counter-cyclical” factor to control yuan weakness through the week. Any hope that Trump might back down on his recent threat to raise Chinese import tariffs was extinguished, with fresh punitive 15% tariffs on $110b of Chinese imports kicking in from yesterday (1 September), and Trump remaining defiant as ever on tariffs via twitter.

The US-China trade war remains a key influence on the NZD, the logic being that a weaker yuan reflects China growth concerns, reduced demand for commodities and weaker sentiment for commodity currencies. The NZD and CNY have been closely correlated since the trade war began early last year. Looking at performance during the month of August both the CNY and NZD fell by 3.8% against the USD.

The NZD’s recent underperformance also reflects the surprise 50bps cut by the RBNZ earlier this month and backed up by some soggy economic data. Last week the ANZ business outlook survey showed confidence and many activity indicators falling to levels last seen during the GFC. The survey straddled the RBNZ’s rate cut and there was no discernible improvement in confidence after the larger rate cut was announced. The data continues to raise a question mark over the state of the NZ economy and whether GDP growth of 2-2½% can be maintained.

Where to from here for the NZD? The 7% fall in the NZD since mid-July has been large and might argue for some consolidation around the current level. Technical relative strength indicators suggest it looks a little over-sold, while our short-term model estimate suggests fair value around the 0.65-0.66 mark. But we expect the fair value estimate to continue to fall with potential for lower risk appetite and lower commodity prices.

The path of least resistance for the rest of the year is further downside in the NZD if we are correct in our assumption that the yuan can weaken further. Our prevailing forecasts have the NZD settling into a 0.60-0.63 range later in the year. That said, we wouldn’t rule out the

chance of a near-term pop-up in the NZD, but such a move likely wouldn’t be sustained unless the trade war came to a sudden end, which is unlikely.

In the week ahead, only second tier domestic economic indicators are released. In the US, the ISM manufacturing and non-manufacturing indicators and non-farm payrolls are key releases, while a number of Fed speakers will be on the circuit. Both the Bank of Canada and RBA meetings are widely expected to show unchanged policy. Australian Q2 GDP is also on our watchlist.

GBP will be in the spotlight as the UK Parliament returns from its summer recess. Last week Boris Johnson announced that the Queen’s speech will take place on 14 October, effectively suspending parliament for almost five weeks in the run-in to 31st October. Opponents rightly saw that as a thin veneer for closing Parliament for much of the period leading into the Brexit leave date on 31st October. A game of political brinksmanship is being played and an extremely wide range of GBP outcomes is possible over the next two months.

NZD probing fresh multi-year lows

Cross Rates and Model Estimates

jason.k.wong@bnz.co.nz

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

2015 2016 2017 2018 2019

Source: BNZ, Bloomberg

Current Last 3 -weeks range*

NZD/USD 0.6303 0.6280 - 0.6470

NZD/AUD 0.9370 0.9350 - 0.9560

NZD/GBP 0.5185 0.5150 - 0.5370

NZD/EUR 0.5734 0.5680 - 0.5810

NZD/JPY 66.87 66.30 - 69.20

*Indicative range over last 3 weeks, rounded figures

BNZ Short-term Fair Value Models

Model Est. Actual/FV

NZD/USD 0.6560 -4%

NZD/AUD 0.9300 1%

Markets Outlook

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2 September 2019

Page 8

Technicals

NZD/USD

Outlook: Downside risk

ST Resistance: 0.6500 (ahead of 0.6600)

ST Support: 0.6240 (ahead of 0.6130)

Downward momentum remains heavy. Support levels are fairly weak given they reflect levels seen over 3 years ago. Next stop 0.6240?

NZD/AUD

Outlook: Trading Range

ST Resistance: 0.9670 (ahead of 0.9740)

ST Support: 0.9320 (ahead of 0.9200)

Downward momentum is heavy with the next suport level

kicking in around 0.9320.

jason.k.wong@bnz.co.nz

jason.k.wong@bnz.co.nz

NZ 5-year Swap Rate

Outlook: Lower

ST Resistance: 1.08

ST Support: 0.82

I have widened channel and remain inclined to lower rates. However, stop above 1.08 recent high.

NZ 2-year - 5-year Swap Spread (yield curve)

Outlook: Flatter

ST Resistance: +5.5

ST Support: -1

Trading a fairly tight range, retain flattener until resistance breached.

pete_mason@bnz.co.nz

pete_mason@bnz.co.nz

NZ 2yr 5yrSwap Spread – Daily Source: Bloomberg

NZ 5-yr Swap – Daily Source: Bloomberg

NZD/AUD – Daily Source: Bloomberg

NZD/USD – Daily Source: Bloomberg

Markets Outlook

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2 September 2019

Page 9

Quarterly Forecasts

Forecasts as at 2 September 2019

Key Economic Forecasts

Quarterly % change unless otherwise specified Forecasts

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

GDP (production s.a.) 0.5 0.9 0.4 0.6 0.6 0.5 0.5 0.7 0.7 0.6

Retail trade (real s.a.) 0.2 0.9 0.3 1.7 0.7 0.2 0.4 0.6 0.5 0.5

Current account (ytd, % GDP) -3.0 -3.3 -3.6 -3.8 -3.6 -3.2 -3.0 -2.7 -2.7 -2.8

CPI (q/q) 0.5 0.4 0.9 0.1 0.1 0.6 0.7 0.2 0.5 0.6

Employment 0.7 0.6 1.0 0.0 -0.1 0.8 0.3 0.3 0.4 0.4

Unemployment rate % 4.4 4.4 4.0 4.3 4.2 3.9 4.0 4.2 4.1 4.1

Avg hourly earnings (ann %) 4.0 3.3 3.6 3.7 3.7 4.7 4.4 4.3 4.3 4.0

Trading partner GDP (ann %) 4.1 4.1 3.7 3.5 3.3 3.2 3.3 3.4 3.3 3.3

CPI (y/y) 1.1 1.5 1.9 1.9 1.5 1.7 1.5 1.6 1.9 1.9

GDP (production s.a., y/y)) 3.1 3.2 2.7 2.5 2.5 2.1 2.2 2.3 2.4 2.5

Interest Rates

Historical data - qtr average Government Stock Swaps US Rates Spread

Forecast data - end quarter Cash 90 Day 5 Year 10 Year 2 Year 5 Year 10 Year Libor US 10 yr NZ-US

Bank Bills 3 month Ten year

2018 Jun 1.75 2.00 2.35 2.90 2.25 2.70 3.15 2.35 2.90 -0.06

Sep 1.75 1.90 2.10 2.60 2.05 2.45 2.95 2.35 3.00 -0.45

Dec 1.75 1.95 2.05 2.55 2.05 2.40 2.85 2.80 2.85 -0.42

2019 Mar 1.75 1.90 1.75 2.15 1.85 2.05 2.45 2.60 2.55 -0.56

Jun 1.60 1.70 1.45 1.80 1.55 1.65 2.05 2.40 2.05 -0.45

Forecasts

Sep 1.00 1.10 0.75 1.00 0.95 0.95 1.20 2.05 1.50 -0.50

Dec 0.75 0.95 0.70 0.95 0.85 0.90 1.15 2.05 1.50 -0.55

2020 Mar 0.75 0.95 0.70 0.95 0.85 0.90 1.15 2.05 1.50 -0.55

Jun 0.75 0.95 0.75 1.05 0.85 0.95 1.25 2.05 1.60 -0.55

Sep 0.75 0.95 0.80 1.10 0.85 1.00 1.30 2.05 1.70 -0.60

Dec 0.75 0.95 0.90 1.30 0.85 1.10 1.50 2.05 1.80 -0.50

2021 Mar 0.75 0.95 1.05 1.45 0.95 1.25 1.65 2.05 1.90 -0.45

Jun 0.75 1.05 1.25 1.70 1.05 1.45 1.90 2.05 2.00 -0.30

Sep 1.00 1.30 1.55 2.00 1.30 1.75 2.20 2.05 2.10 -0.10

Exchange Rates (End Period)

USD Forecasts NZD Forecasts

NZD/USD AUD/USD EUR/USD GBP/USD USD/JPY NZD/USD NZD/AUD NZD/EUR NZD/GBP NZD/JPY TWI-17

Current 0.63 0.67 1.10 1.22 106 0.63 0.94 0.57 0.52 66.8 70.6

Sep-19 0.64 0.67 1.10 1.17 105 0.64 0.95 0.58 0.55 67.5 72.4

Dec-19 0.62 0.65 1.12 1.20 104 0.62 0.94 0.55 0.51 64.0 70.0

Mar-20 0.62 0.66 1.11 1.18 104 0.62 0.93 0.56 0.52 64.1 70.0

Jun-20 0.63 0.67 1.13 1.20 105 0.63 0.94 0.56 0.53 66.2 70.9

Sep-20 0.65 0.69 1.14 1.22 106 0.65 0.94 0.57 0.53 68.9 72.3

Dec-20 0.65 0.70 1.15 1.24 106 0.65 0.93 0.57 0.52 68.9 71.6

Mar-21 0.66 0.71 1.16 1.26 107 0.66 0.93 0.57 0.52 70.6 72.3

Jun-21 0.67 0.72 1.17 1.28 108 0.67 0.93 0.57 0.52 72.4 72.7

Sep-21 0.68 0.73 1.19 1.28 109 0.68 0.93 0.57 0.53 74.1 73.1

Dec-21 0.69 0.74 1.20 1.30 109 0.69 0.93 0.58 0.53 75.2 73.5

TWI Weights

14.0% 20.7% 10.3% 4.8% 6.8%

Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ

Markets Outlook

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2 September 2019

Page 10

Annual Forecasts

Forecasts December Years

as at 2 September 20192018 2019 2020 2021 2022 2017 2018 2019 2020 2021

GDP - annual average % change

Private Consumption 4.1 3.3 2.4 1.9 1.9 4.7 3.2 2.7 1.9 1.9

Government Consumption 2.8 1.9 3.6 2.8 0.6 2.9 1.9 3.0 3.5 0.7

Total Investment 4.7 2.5 2.2 3.4 3.4 3.5 3.6 2.3 3.0 3.6

Stocks - ppts cont'n to growth -0.2 0.1 -0.1 0.0 0.0 -0.1 0.4 -0.5 0.1 0.0

GNE 3.7 2.9 2.2 2.4 2.1 4.0 3.5 1.8 2.6 2.1

Exports 3.0 3.6 1.1 2.8 3.2 1.8 3.1 2.7 1.8 3.1

Imports 7.1 4.1 0.5 2.7 3.2 6.9 5.7 0.4 2.3 3.1

Real Expenditure GDP 2.7 2.8 2.5 2.4 2.0 2.6 2.8 2.6 2.5 2.0

GDP (production) 3.2 2.7 2.2 2.4 2.0 3.1 2.9 2.3 2.4 2.0

GDP - annual % change (q/q) 3.1 2.5 2.4 2.2 2.1 3.4 2.5 2.3 2.4 2.0

Output Gap (ann avg, % dev) 1.0 1.0 0.7 0.5 0.2 1.0 1.0 0.7 0.6 0.3

Household Savings (% disp. income) -1.4 -2.5 -3.3 -3.3 -2.8

Nominal Expenditure GDP - $bn 285.0 296.2 309.1 320.5 329.3 282.1 293.1 305.6 318.0 326.9

Prices and Employment - annual % change

CPI 1.1 1.5 1.9 1.8 1.7 1.6 1.9 1.6 1.7 1.7

Employment 3.1 1.5 1.8 1.6 1.5 3.7 2.3 1.3 1.6 1.4

Unemployment Rate % 4.4 4.2 4.1 3.9 3.7 4.5 4.3 4.2 4.0 3.8

Wages - ahote 4.0 3.7 4.3 3.6 3.0 3.1 3.7 4.3 3.9 3.2

Productivity (ann av %) -0.4 -0.2 0.3 0.9 0.6 -1.1 -0.3 0.3 0.9 0.5

Unit Labour Costs (ann av %) 3.5 3.4 3.2 2.4 2.4 3.7 3.7 3.3 2.4 2.5

External Balance

Current Account - $bn -8.5 -10.6 -8.5 -9.4 -13.2 -8.2 -11.2 -8.3 -9.2 -12.1

Current Account - % of GDP -3.0 -3.6 -2.7 -2.9 -4.0 -2.9 -3.8 -2.7 -2.9 -3.7

Government Accounts - June Yr, % of GDP

OBEGAL (core operating balance) 1.9 1.6 0.2 0.1 0.6

Net Core Crown Debt (excl NZS Fund Assets) 19.9 19.7 20.2 21.0 20.9

Bond Programme - $bn 8.0 8.0 11.0 12.0 12.0

Bond Programme - % of GDP 2.8 2.7 3.6 3.7 3.6

Financial Variables (1)

NZD/USD 0.73 0.68 0.62 0.66 0.69 0.70 0.68 0.62 0.65 0.69

USD/JPY 106 111 104 107 109 113 112 104 106 109

EUR/USD 1.23 1.13 1.11 1.16 1.20 1.18 1.14 1.12 1.15 1.20

NZD/AUD 0.94 0.96 0.93 0.93 0.93 0.91 0.95 0.94 0.93 0.93

NZD/GBP 0.52 0.52 0.52 0.52 0.52 0.52 0.54 0.51 0.52 0.53

NZD/EUR 0.59 0.60 0.56 0.57 0.58 0.59 0.60 0.55 0.57 0.58

NZD/YEN 77.0 75.9 64.1 70.6 75.2 78.7 76.4 64.0 68.9 75.2

TWI 74.8 74.3 70.0 72.3 73.7 73.6 74.6 70.0 71.6 73.5

Overnight Cash Rate (end qtr) 1.75 1.75 0.75 0.75 1.50 1.75 1.75 0.75 0.75 1.25

90-day Bank Bill Rate 1.93 1.88 0.95 0.95 1.78 1.88 1.98 0.95 0.95 1.53

5-year Govt Bond 2.35 1.65 0.70 1.05 1.85 2.30 1.95 0.70 0.90 1.70

10-year Govt Bond 2.95 2.00 0.95 1.45 2.20 2.80 2.40 0.95 1.30 2.10

2-year Swap 2.25 1.80 0.85 0.95 1.75 2.20 2.05 0.85 0.85 1.50

5-year Swap 2.70 1.95 0.90 1.25 2.05 2.65 2.30 0.90 1.10 1.90

US 10-year Bonds 2.85 2.55 1.50 1.90 2.20 2.40 2.85 1.50 1.80 2.20

NZ-US 10-year Spread 0.10 -0.55 -0.55 -0.45 0.00 0.40 -0.45 -0.55 -0.50 -0.10

(1) Average for the last month in the quarter

Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ

ForecastsActualsForecasts

March Years

Actuals

Markets Outlook

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Key Upcoming Events

Forecast ... Median ----- Last Forecast ... Median ------ Last

Monday 2 September NZ, Terms of Trade, Q2 +1.6% +1.0% +1.0% Aus, Company Profits, Q2 +6.0% +2.0% +1.7% Aus, ANZ Job Ads, August 0.8% Aus, CoreLogic HPI, August 0.1% China, PMI (Caixin), August 49.8 49.9 Jpn, Capital Spending, Q2 y/y +1.7% +6.1% UK, Markit/CIPS Manuf Survey, August 48.4 48.0 US, Holiday, Labor Day Tuesday 3 September NZ, Finance Minister Robertson Speaks, 15:30 NZT Aus, RBA Policy Announcement 1.00% 1.00% 1.00% Aus, Retail Trade, July +0.1% +0.2% +0.4% Aus, BOP Goods and Services, Q2 +0.5ppts +0.3ppts +0.2ppts Euro, PPI, July y/y +0.2% +0.7% US, ISM Manufacturing, August 51.2 51.2 US, Construction Spending, July +0.3% -1.3% Wednesday 4 September NZ, ANZ Comdty Prices (world), August-1.8% -1.4% NZ, QVNZ House Prices, August y/y +2.2% NZ, Dairy Auction, GDT Price Index -0.2% Aus, GDP, Q2 +0.5% +0.5% +0.4% China, Services PMI (Caixin), August 51.7 51.6

Euro, Retail Sales, July -0.6% +1.1% UK, BOE's Carney et al Testify UK, Markit/CIPS Services, August 51.0 51.4 US, International Trade, July -$53.5b -$55.2b US, Beige Book US, Fed's Williams Speaks Can, BOC Policy Announcement 1.75% Thursday 5 September NZ, Building Work Put In Place, Q2 vol s.a.flat +6.2% Aus, International Trade, July +$8.80b +$6.60b +$8.04b Germ, Factory Orders, July -1.4% +2.5% US, Factory Orders, July +1.0% 0.6% US, ISM Non-Manuf, August 54.0 53.7 US, ADP Employment, August +146k +156k Friday 6 September NZ, Wholesale Trade, Q2 ($) s.a. +0.7% Jpn, Household Spending, July y/y (real) +0.9% +2.7% Euro, Eurozone Employment, Q2 y/y 2nd est +1.1%P Euro, GDP, Q2 3rd estimate +0.2% +0.2%P Germ, Industrial Production, July +0.4% -1.5% US, Non-Farm Payrolls, August +158k +164k Sunday 8 September China, Trade Balance, August +¥310b

Historical Data

Today Week Ago Month Ago Year Ago Today Week Ago Month Ago Year Ago

CASH AND BANK BILLS SWAP RATES

Call 1.00 1.00 1.50 1.75 2 years 0.90 0.94 1.18 1.97

1mth 1.18 1.17 1.42 1.82 3 years 0.88 0.92 1.15 2.06

2mth 1.18 1.18 1.43 1.87 4 years 0.89 0.92 1.16 2.18

3mth 1.20 1.21 1.43 1.92 5 years 0.93 0.95 1.19 2.30

6mth 1.14 1.15 1.38 1.94 10 years 1.19 1.20 1.49 2.81

GOVERNMENT STOCK FOREIGN EXCHANGE

04/20 0.82 0.87 1.12 1.63 NZD/USD 0.6302 0.6394 0.6528 0.6601

05/21 0.79 0.77 0.94 1.67 NZD/AUD 0.9367 0.9437 0.9663 0.9149

04/23 0.77 0.75 0.94 1.90 NZD/JPY 66.83 67.87 69.16 73.31

04/25 0.84 0.82 1.03 2.16 NZD/EUR 0.5735 0.5760 0.5827 0.5681

04/27 0.96 0.94 1.17 2.35 NZD/GBP 0.5185 0.5234 0.5377 0.5129

04/29 1.07 1.05 1.31 2.52 NZD/CAD 0.8393 0.8477 0.8616 0.8644

04/33 1.25 1.22 1.51 2.69

04/37 1.41 1.38 1.68 2.84 TWI 70.7 71.4 72.7 71.9

GLOBAL CREDIT INDICES (ITRXX)

Nth America 5Y 54 56 62 60

Europe 5Y 49 53 58 68

Markets Outlook

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Contact Details

BNZ Research

Stephen Toplis Head of Research +64 4 474 6905

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Nick Smyth Interest Rates Strategist +64 4 924 7653

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National Australia Bank

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