How Will The Markets React?
All of the New Zealand markets have had an active year so far. Government bond yields, equities and the national currency have all been driven higher over the past few months as interest rates step higher and higher into record territory while consumer spending continues unperturbed by the additional burden. However, these conditions cannot last forever. Eventually consistent loan and mortgage payments will overshadow employment and wage trends to eat away at consumer confidence and consumption. The real question is when will this happen? Come Monday early Monday morning, the markets will see whether or not the turn has already begun. Coming not two weeks after the RBNZ?s decision to hike rates to a new record high 7.75 percent, the economic calendar will roll around to the monthly retail sales numbers. The official consensus for sales activity is already near basement levels with projections of a 0.2 percent contraction - following the biggest increase in three years. This is certainly not an unusual forecast for the volatile indicator. At the same time, such a sharp turn would not have much trouble rousing pessimists in the markets. Though, in rebuttal, bearish sentiment may be bubbling up to price in a greater disappointment than data would actually suggest. To grasp how this may work, one needs only look at the US markets? reaction to its own retail activity report. Aside from expectations and pre-release positioning, the indicator will have considerable impact on growth and monetary policy. When RBNZ Governor Alan Bollard announced his decision to raise rates last month, he suggested that it may very well be the last in the cycle. However, he made sure to keep the future contingent on housing and consumer spending trends. Therefore, a weak retail sales report may finally confirm the top in rates.
Bonds - 10-Year New Zealand Government Bond Future
New Zealand government bonds have undergone impressive and volatile trends in the past month. The real volatility began last month on April 12th when the Statistics Bureau printed the biggest jump in retail sales since March of 2004. It only took a short time for the data to fully saturate the market. When traders realized the increase could result in another 25 basis point hike at the next meeting, the rally began and the active futures on the benchmark 10-year note rallied from around 5.950 all the way to 6.265. Considering the extent of this rally, it easy to garner the importance market participants have levied on retail sales. Come Monday, the theory will be tested again, except this time analysts and traders will have to decide whether a sales drop will actually turn the yield curve.
FX - NZD/USD
Former support has turned into resistance for NZD/USD as the pair?s plunge appears to have stalled and made a comeback towards 0.7350. Is the high-yielding New Zealand dollar in for a correction rally? Not if retail sales have anything to do with it. The figure is anticipated to drop -0.2 percent in March after the figure showed a robust 1.9 percent increase the month prior. While it may have been necessary for the RBNZ to raise the benchmark to 7.75 percent in an attempt to constrict booming consumption and credit growth, the retail sector will soon suffer. More importantly, disappointing economic data for the months prior to the central bank?s hike may make it clearer that RBNZ Governor Alan Bollard knocked the ball out of the court by tightening policy, as the shift in rates may be a send New Zealand expansion down the tubes and could potentially send NZDUSD lower to 0.7200.
Equities - NZX FF 50 Index
New Zealand shares eased back on Friday as top stocks succumbed to profit-taking, sending the NZX-50 index down 0.6 percent to 4226.39 on moderate volume. Fletcher Building closed down 2.7 percent at NZ$11.57 after brushing an all time high of NZ$12.01 on Thursday on news of one-time gains that will boost its 2007 net profit. Airport operator Auckland International Airport fell 0.4 percent to NZ$2.69 as investors took profit following its recent run up on rumored takeover activity. Energy generator and retailer Contact Energy slipped 0.9 percent to NZ$8.65, but in contrast, rival TrustPower added a further 2.4 percent to NZ$8.40 after reporting a 20 percent higher 2007 operating profit.
New Zealand equities could continue to fall on the back softer retail sales in the month of March. The figure is estimated to dip -0.2 percent after surging 1.9 percent during the month prior, signaling that interest rates - even before the most recent RBNZ hike - have cooled consumption quite a bit. While this is a plus for stock markets in that the central bank has little reason to raise rates further, equity traders may be concerned that the retail sector will suffer throughout the year. However, it will take a break of the NZX-50 index?s supporting trendline near 4,225 before prices look overtly bearish, the outlook is not good.