Last week saw swap rates climb to near pre OCR announcement levels, while the NZD has soared more than 3 cents back through USD0.60.
Some of this is attributable to the swathe of NZ labour market data released last week, which, on the whole, was not as weak as it might have been. However, the main factor has been an ongoing gravitation towards risk in international sentiment. We believe the surge of optimism is due to run out of puff soon, but picking the timing is fraught.
The Quarterly Employment Survey (Monday) showed that private sector average hourly earnings rose 1.1% in Q1, a little above our forecast (0.7%). QES hours paid give a hint about the state of economic activity in the first quarter. The 0.4% fall followed on from a 1.4% drop in Q4, and is consistent with our current Q1 GDP pick of -1.0% (but given the volatility of this series, a wide range of outcomes would be!).
The Q1 Labour Cost Index data (Wednesday) were bang on our, market, and RBNZ expectations and confirmed what we already knew – the weaker labour market is feeding through into slower wage growth. The 0.6% quarterly increase in private sector all salary and wage rates, the RBNZ’s preferred measure, follows increases of 0.7%, 0.8%, 1.1% and 0.7% in the past year. We expect annual wage growth to slow from the current 3.1% pace to 2.2% by the end of the year, and to reach a low of 1.8% mid-2010.
